Banksvmbia 5.22 Transcript

7/31/2019 Banksvmbia 5.22 Transcript

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12 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: TRIAL TERM PART 393 - - - - - - - - - - - - - - - - - - - - - X ABN AMRO BANK N.V.; BARCLAYS BANK PLC;4 BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA,5 N.A., JP MORGAN CHASE BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.;6 MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL7 SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE8 RAIFFEISEN BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK9 OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and10 WACHOVIA BANK, N.A.,11 PETITIONERS,12 - against -13

ERIC DINALLO, in his capacity as Superintendent14 of the New York State Insurance Department; the NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.;15 MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA16 INSURANCE CORP. OF ILLINOIS),17

RESPONDENTS.18 - - - - - - - - - - - - - - - - - - - - - X INDEX NO: 601846/09 60 Centre Street19 New York, New York May 22, 20122021 BEFORE: HONORABLE BARBARA R. KAPNICK, Justice22

APPEARANCES:23

SULLIVAN & CROMWELL, LLP24 Attorneys for Petitioners 125 Broad Street25 New York, New York BY: ROBERT J. GIUFFRA, JR., ESQ.26 MICHAEL H. STEINBERG, ESQ.

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1 PROCEEDINGS2

KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP3 Attorneys for Respondents

1633 Broadway4 New York, New York BY: MARC E. KASOWITZ, ESQ.5 KENNETH DAVID, ESQ.67 OFFICE OF THE ATTORNEY GENERAL Attorneys for State Respondents8 120 Broadway New York, New York9 BY: DAVID HOLGADO, ESQ. MARK KLEIN, ESQ.10 JOSHUA GREENBLATT, ESQ.11121314

15 NINA J. KOSS, C.S.R., C.M. BARBARA STROH16 Official Court Reporters17181920212223242526

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1 PROCEEDINGS - HOLGADO2 THE COURT: Good morning.3 MR. HOLGADO: Good morning, your Hono4 THE COURT: We have several copies of your lette5 Mr. Giuffra, but I think we will deal with that a little b

6 later if that's okay.7 MR. GIUFFRA: That's fine, your Honor.8 THE COURT: So, Mr. Holgado, ready for you 9 continue?10 MR. HOLGADO: Okay. Thank you, your Hon11 Good morning, your Honor. Good morning 12 everyone. I am going to do my best for your Honor an

13 Nina's benefit and for everyone's benefit today, to talk

14 little bit slower so, I may not sound like myself, but let

15 try.16 THE COURT: Try.17 MR. HOLGADO: Your Honor, I said yesterday, perha18 Mr. Giuffra doesn't watch enough television. Perha

19 actually, it's the case that I watch too much televisio

20

but what I would like to do first is just do a brief reca21 of yesterday's episode, if you will.22 Where we started, your Honor, we first discusse23 the extraordinary amount of process that had been afforde

24 the Petitioners in this case. Here is all of that proces25 that we went through, your Honor, to show the discover

26 that was sought and very often permitted by the Court i

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1 PROCEEDINGS - HOLGADO2 order to provide Petitioners with not only their day i3 Court, your Honor, but almost three years in Cou

4 We then, your Honor, went over the Departmen5 measured response to the municipal credit crisis and i

6 approach also to MBIA, in particular, which included,

7 started with taking the temperature of the various FGIs a

8 implementation of a three point plan to facilitate capit

9 infusions in order to strengthen the FGIs for the benefit

10 not only the municipal bond market, which we will actuall

11 pick up on that again, that's where we left off actuall12 but to not only facilitate them, not only for the benefit o

13 the municipal bond insurance market, but to the benefit

14 the policy holders of these FGIs themselves.15 We also discussed in connection with this respons

16 the initial discussions that MBIA engaged, in early 200

17 with The Department, regarding a potential restructurin18 The reasons why the Department thought that it was prematu

19 at that time, in particular the AAA rating that remaine

20 with MBIA Corp. at that time, we then discussed how th

21 changed and how MBIA's rating was no longer AAA and how th

22 made a big difference to the Department and allowed them

23 reconsider this restructuring.24 We briefly touched on a subject that we ended wit

25 actually yesterday, your Honor, which was the conversation

26 that the Department had with Federal officials.

Min-U-Script NYS Supreme Court Reporters (1) Page 785 - Page 7


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1 PROCEEDINGS - HOLGADO2 THE COURT: Excuse me.3 MR. HOLGADO: Conversations that began, your Honor,4 those conversations with the Federal officials that began in

5 mid 2008, but as we showed at the end of the day yesterday,

6 continued all the way through to January 2009.7 We then talked about the application itself and how

8 it was presented by MBIA in late October, how there were9 several weeks of meetings and how, prior even to the10 application being submitted the Department in exercise of

11 its regulatory authority, recommended to MBIA that they

12 leave additional $750 million in capital with MBIA Corp. for

13 the benefit of the structured policy, structured finance

14 policy holders that had brought this suit, your Honor.15 We then, your Honor, moved on to discuss the sort

16 of organizing principles that the Department had and the

17 resources that it marshalled together for the transformation

18 review.19 We started by talking about those resources. In20 particular for the legal analysis, your Honor, they relied

21 on Fried Frank, as well in-house counsel, importantly Scott

22 Fischer, but that for the financial review, which is the

23 really the subject of a lot of the arguments that we are

24 having before you, your Honor, they relied on a team that

25 included Hampton Finer, the chief economist, Michael

26 Moriarity and both Jack Buchmiller who, of course, led this

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1 PROCEEDINGS - HOLGADO2 review and we will talk more about him today, of course, and

3 his supervising, his direct supervisor, Matty Peltonen, and

4 how we showed, your Honor, that even according to Mr.5 Buchmiller's contemporaneous e-mails, he benefitted from the

6 support of the team of examiners who were in the midst of an

7 ongoing statutory, full scope normal examination under8 Insurance Law 309.9 We then touched upon very briefly, your Honor, how

10 Perella Weinberg was also a resource that Mr. Dinallo

11 specifically said he had and used with respect to certain

12 issues, most specifically, who he relied on to find out or13 get a clearer picture of what the structured finance policy

14 holders' position might be with respect to transformation.

15 After that, your Honor, we turned to the sort of16 and this is the organizing principles part, the organizing

17 principles around the financial review, which again, the18 Department and Mr. Dinallo entrusted Mr. Buchmiller to

19 determine the scope of his review and the approach that he

20 would take, but with one caveat in mind, which is that his

21 review should address the principles, the principle focus of

22 his review should be to address Mr. Dinallo's, quote23 unquote, paramount concern, which is to insure that MBIA

24 Corp. would be left with the ability to pay its claims as

25 they come due and thus, be -- thus be solvent under the

26 Insurance Law.

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1 PROCEEDINGS - HOLGADO2 In addition, based on having delegated to him tha

3 he would determine the scope of his review, Mr. Buchmill

4 understood and was conveyed to him that there was a need f

5 him to not only be thorough with his review, but to be swi

6 and as expeditious as possible with the review under th

7 circumstances.8 Again, in part because of considerations not on9 of the Federal assistance issue, but in particular, the nee

10 to unfreeze the muni market, which is again, we are going

11 start today.12 We also talked, your Honor, about how Mr13 Buchmiller, in determining the approach to his review

14 realized that he was unable to and no one could, in fa

15 determine whether loss models could be precisely, quo

16 unquote, accurate.17 No one could know that they were accurate in th18 present. That could only be assessed in hindsight. S

19 thus, Mr. Buchmiller understood his task to be, and th

20

Department understood his task to be to review th21 analytical soundness of the loss modeling methodologie22 around the loss modeling.23 Finally, your Honor, Mr. Buchmiller determined th

24 his review would appropriately be risk focused, which is a

25 approach that has been adopted by the National Associatio

26 of Insurance Commissioners, and was essentially pioneere

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1 PROCEEDINGS - HOLGADO2 Mr. Buchmiller, Mr. Buchmiller himself.3 Mr. Buchmiller determined that in connection wi

4 this focus review, it would be appropriate for him and, i5 fact, this is the organizing, this is the reason behind th

6 risk focus review, it will be important to start with th

7 key sectors, the sectors in which losses were alread8 occurring or sectors in which losses could be significan

9 losses could be expected to occur possibly, possibly occu

10 So, for that reason he chose, your Honor, to focus on th

11 RMBS, ABS CDOs and CMBS sectors.12 Now, we then talked to your Honor about the sort

13 nuts and bolts of Mr. Buchmiller's risk focused review

14 transformation review. We talked about how he started

15 December interviewing over a dozen MBIA officers an

16 employees, some of the top executives of the company,

17 well as their top structured finance experts.18 And, how he did so, as part of this risk focu19 review in order to assess the company's ability to itse

20 assess its own risk profile and its ability to come up wi

21 intelligent, appropriate responses to deal with those ris

22 and to address those risks.23 He then, your Honor, when he returned to the MBI

24 offices in January, he began in earnest his review of thes

25 key sectors starting with RMBS and then ABS CDOs, where h

26 did a bottom up review as we showed you, have samp



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1 PROCEEDINGS - HOLGADO2 transactions in those sectors, and then extrapolated the3 results of his review of the loss modeling methodologies

4 used for those sample transactions, extrapolated those

5 results to the rest of those sectors, and to many other6 transactions in those sectors, in order to assure that these

7 methodologies were being consistently applied with respect

8 to the other transactions.9 He then conducted again, a top down review of both

10 of those sectors, which involved something that we are going

11 to talk about today again, which are the hypothetical stress

12 scenarios presented to him by MBIA, including importantly,

13 and by "importantly" I just mean for discussion purposes,

14 the hypothetical break the bank or extreme stress scenario

15 which we went over in detail yesterday. I will cover it16 again, hopefully in not as much detail, but as a refresher.

17 Later, I will cover it again, which the crucial18 thing to understand about it was solving backwards. That,

19 the result was already ordained by the nature of scenario.

20 He wanted to break the bank and then see what it took to do

21 so, see what assumptions of economic stress conditions it

22 took to do so.23 So therefore, from the results he actually had with

24 respect to the hypothetical stress scenario, he got close to

25 the breaking point, and it was close enough because it

26 didn't need to be exact. The purpose was not to see what

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1 PROCEEDINGS - HOLGADO2 that number was. The purpose was to get it to about that

3 number -- then, eyeball the stress conditions that were

4 assumed, and decide whether those were sufficiently5 stressful to be improbable so that he could comfort himself

6 that the MBIA could withstand significant additional stress.

7 That's exactly what he did, your Honor. He8 determined that the results of that scenario assumed stress

9 conditions that were highly improbable and, in fact, as he

10 said, I will say it right again, apocalyptic, near11 apocalyptic, your Honor.12 He did that and he then, he turned to the CMBS13 sector and conducted a similar review, both bottom up and

14 top down, and determined in the course of his top down

15 review of the CMBS sector that, unlike RMBS and ABS CDOs

16 where the company had already experienced losses, CMBS was a

17 sector where they had not experienced significant losses and18 Mr. Buchmiller, after his review, concluded that there was a

19 good reason for that.20 It was not just for the reason we talked about21 briefly, about the attachment points and the fact that they

22 insured the most senior tranches, but in general, Mr.23 Buchmiller concluded in his review that the underwriting

24 standards with respect to commercial mortgages were

25 maintained in a way that no, that no doc and little26 verification type of mortgages done in the residential type

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1 PROCEEDINGS - HOLGADO2 context weren't maintained. For that reason, he concluded

3 your Honor, that there was less systemic risk in the CMB

4 sector than there would be and there already was in th

5 other two that he had started with.6 After that, your Honor, in around the same time h

7 had a top down review of all of the remaining sectors o

8 CMBS exposures. In particular, a lot of those exposur9 were very small in amount compared to these other sectors

10 more importantly, were in sectors where there wasn't th

11 same indication of risk in particular, because a lot o12 these sectors, your Honor, did not even involve mortgag

13 backed securities.14 After that nuts and bolts review, your Honor, i

15 discussing that, we then turned to the fact that M16 Buchmiller actually reached conclusions, despite17 Petitioners' contention that he did not, and in particul18 we cited his affidavit and Mr. Dinallo's affidavit. I wi

19 read these two again for you rather than read a bunch o

20 them. We showed you a lot of his conclusions, your Hono

21 Mr. Buchmiller concluded and he said, he conclude

22 by the transformation approval date that based on h23 review, there was no reason not to approve the24 transformation. Superintendent Dinallo, your Honor, had

25 very similar thing to say. He said he met several tim

26 with the Department's senior staff and he also met with M

Page 7

1 PROCEEDINGS - HOLGADO2 Buchmiller frequently and he was informed after two mont

3 of extensive review of MBIAs loss modeling, that M

4 Buchmiller had reached this conclusion he had found no bas5 for questioning the analytical soundness of MBIA Corp's lo

6 modeling methodologies.7 Now, for that, your Honor, after that, your Hono8 we talked about how the banks have said that we have mad

9 up, as we went along or three years after the fact, all o

10 these reasons why the Department approved the11 transformation.12 We began to talk to your Honor about how, in fac

13 the evidence in the record shows that not only is M14 Dinallo and Mr. Buchmiller, not only are they saying thes

15 things in their affidavits filed in connection with ou16 surreply papers, and not only in the affidavits filed wi

17 our answer, but that at the time of the approval and at th18 time of the review, your Honor, the Department had the ve

19 same reasons. These reasons were then therefore, pre ho

20 and not post hoc.21 In particular, your Honor, the three things that w

22 covered, the first two that we covered, the first on23 perhaps the most important, was essentially that th24 interpretation of the Insurance Law by the Department an

25 specifically Mr. Dinallo, was that the three main provision

26 that we have been talking about here, Section 1505, relatin



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1 PROCEEDINGS - HOLGADO2 to reinsurance agreements between holding company system

3 affiliates, Section 1411(d) relating to share redemptions

4 and Section 4105 relating to dividends, that all of the5 standards in these statutes would be complied with as long

6 as the Department concluded that MBIA Corp would be able to

7 pay its claims, as they come due, following transformation.

8 We showed not only that they are saying that now,9 but that we walked it back for your Honor and showed how, in

10 the weeks following transformation, but even before11 transformation was approved, and even at the outset of

12 transformation, your Honor, this was the standard that the

13 Department understood to be, as Mr. Dinallo called it, the

14 only test that really matters.15 Then, we covered, your Honor, some legal arguments

16 that the Petitioners have made regarding the simultaneity of

17 the transactions and we showed you how again, not just after

18 the fact, but that in the application itself, the19 application referred, refers to the simultaneous nature of

20 the transactions and that was how everyone in the Department

21 understood it, and that's how they have all testified from

22 the beginning of this case.23 Your Honor, we then pointed out that those two

24 reasons were sufficient, that that's all the Department25 needed to do and needed to have as its reasons. This

26 complied with the Insurance Law, including because the

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1 PROCEEDINGS - HOLGADO2 transactions are simultaneous, and that the rest of these3 reasons that I am about to go over with you, and I went over

4 one of them yesterday, were extra reasons, but nonetheless,5 valid ones, and we then covered, your Honor, how Mr.6 Dinallo's testimony at his deposition and in his affidavit,

7 that he was actually trying to help the banks, was8 completely supported not only by statements he made near the

9 time of the transformation and on the day of transformation,

10 through his press deputy's -- forget his name -- David11 Neustadt, I forget his title -- but the press deputy David

12 Neustadt, through him, on the day of, but also, that that,13 that -- that reason for approval, your Honor, is evidenced

14 by communications before the transformation between Mr.

15 Dinallo and Federal officials regarding this Federal16 assistance structured finance policy holders, as well as the

17 policy holders -- to both.18 That's where we left off and what I would like to

19 pick up on today is a few more of the pre hoc bases for the

20 Department's approval of transformation and the fourth one

21 is one we have alluded to a couple of times already today,

22 that's the need to unfreeze the municipal bond insurance

23 market which had essentially been frozen as a result of the

24 economic crisis.25 Now, Mr. Dinallo testified about this need and how

26 addressing this need, your Honor, unfreezing that municipal

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1 PROCEEDINGS - HOLGADO2 bond insurance market would serve additional purpose, whic

3 would be to help municipal bond issuers to fund publ

4 infrastructure projects which would thereby aid what w

5 then, a very strong initiative by the new administration

6 the time, to provide an economic stimulus and avoid or t

7 end at least, what was already clear to be a recession

8 Let's see what Mr. Dinallo said about this concern9 This is in his affidavit, and again, to be clear before10 start reading it, it's two separate paragraphs. I don11 want a suggestion that I am mixing it, without letting yo

12 know.13 He said at paragraph 34, as a result of its14 relative financial stability, the Department believed15 starting in early 2008, that MBIA Corp was a stron16 candidate for a leadership role in unfreezing the municip

17 bond insurance market.18 That's clear from the context of his affidavi19 your Honor. Your Honor, that's the time period in which h

20

is talking about with -- that's why it's in brackets 21 trying to summarize.22 Paragraph 58, he later talks about how, during t23 Department's review of transformation, he says, I understoo

24 that the bond insurance market liquidity concerns ha

25 persisted, and in light of the deepening recession, wer

26 contributing to a national economic emergency.

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1 PROCEEDINGS - HOLGADO2 Again, your Honor, the banks have claimed that th

3 is a newly invented argument by the State Respondents an

4 presumably their lawyers, including myself. The banks ar5 wrong.6 Mr. Moriarity, for instance, your Honor, testifie

7 extensively regarding this basis for the Departmen8 approval, in his affidavit that was submitted initially wit

9 the answer in 2009. Here is what he said.10 We are going to build this, but just for Mr.11 Giuffra's benefit, this is paragraphs 13 and 15 of h12 affidavit. Here is what he said.13 He said, the challenging environment in th14 mortgage credit markets as a result of the subprime pri

15 crisis, has caused the auction rates security market16 market that many municipalities and government entities u

17 as a vehicle to raise funds for public projects at low18 interest rates, to come to a standstill and made it mo

19 difficult for municipalities to obtain reasonable intere

20 rates on new debt.21 He then continued, your Honor. In many cases, co

22 of financing had resulted in government entities postponin

23 key public projects that would serve to benefit the peop

24 of the State of New York.25 Mr. Buchmiller, your Honor, also acknowledged th

26 same considerations of the Department at his firs



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1 PROCEEDINGS - HOLGADO2 deposition that was taken in September of 2010. Here is

3 what he said.4 Mr. Buchmiller noted that there was uncertainty and

5 dislocations in financial markets in the U.S. at this time.

6 To the extent that the Department could do something that

7 would, in its own small way, reduce that distress, that was

8 in the interests of policy holders and the broader public9 interest.10 So, what's noteworthy there, your Honor, he is not

11 saying the broader public interests at the expense of policy

12 holders. Here, it was determined that you could serve both

13 interests at the same time.14 That, bringing MBIA back to market, could not only

15 help, and this will be the next reason, actually we will

16 talk about or one of the next reasons -- yes, pretty soon --

17 next reason, but not only would it, not only would it aid to

18 unfreeze the muni market and help the broader economy, Mr.

19 Buchmiller understood, as everyone in the Department

20 understood, that this would also bring MBIA back to market,

21 serve to help attract capital, and generate revenue for the

22 holding company system for the benefit of all of the policy

23 holders of that holding company system.24 MR. GIUFFRA: Your Honor, just in the interest of25 completeness, Mr. Holgado should read 242 of this26 deposition, lines 17, excuse me, 7 through 19.

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1 PROCEEDINGS - HOLGADO2 MR. HOLGADO: Okay. So, here is the part, the3 question and answer you want to read -- 7 to 19.

4 MR. GIUFFRA: Yes.5 MR. HOLGADO: The next question, your Honor, was6 how would the Department's approval of the transformation

7 transactions, which we removed five billion in assets from

8 MBIA Insurance to MBIA Illinois, be in the interest of9 structured policy holders who would no longer have access to

10 those assets?11 And, there are objections, and then the answer is,12 I don't know if there is any discussion of it at the time,13 but the risk and exposures of the public finance business

14 was transferred away from the structured finance policy

15 holders.16 That's an interesting answer. I wasn't going to

17 cover that here. I covered it in our brief, but there is18 actually this additional benefit, that it was even19 acknowledged in, it was the dissenting opinion of the Court

20 of Appeals, that it can't be said, your Honor, that there is

21 no benefit to the structured from the fact that this22 reinsurance removed, at least in the first instance, the23 municipal policy liabilities from Corp books so, I think

24 that's all Mr. Buchmiller is saying, but in any case --25 thanks. We are done with that.26 (Continued on next page.)

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1 State Respondent-Holgado2 T23 MR. HOLGADO: Your Honor, again, far fro4 being an after-the-fact justification and what I'v5 shown you so far are justifications given to your Hon

6 in this case by the department witnesses.7 But these same observations were made8 contemporaneous or reasonably contemporaneous documen

9 that are part of the record in this case.10 We'll start actually with the file memorandum

11 where Mr. Buchmiller states, and this is at pages 27

12 and 2797 of the file memorandum.13 He says: "From the broader public intere14 perspective, state and local government bond issuan

15 has slowed considerably due to FGI and broade16 financial sector distress.17 "At the same time, all this economic distre18 has increased the need for public sector borrowin19 e.g., New York's unemployment insurance fund20

"Therefore, we have other valid/statutory21 reasons to decide sooner rather than waiting for22 completion of a 'normal examination report.'"23 Again, by "normal," your Honor, he's simpl24 referring to the 12-to-18-month review that is don25 every three to five years of FGIs, and it's done26 pursuant to Insurance Law 309.

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1 State Respondent-Holgado2 Your Honor, the Governor's letter to the3 Treasury, in fact, which is even more contemporaneou

4 It's just a week later, a week after transformatio5 This specifically notes that the6 transformation was approved in order to reinvigorat

7 the municipal bond insurance market, among othe8 reasons.9 Here's what it says: This is from Governo10 Patterson to Secretary Geitner. This is, again, a wee

11 after transformation. This is the same letter, yo12 Honor, that makes the request on behalf of the13 structured finance policyholders for a Federal-bac14 stop for their bank.15 This letter also talks about helping municip16 policyholders. Here's what it says: "One way to he

17 municipal bond issuers is by reinvigorating the mark18 for affordable bond insurance.19 "Many local government officials have state20 that they simply need bond insurance in order to borrow

21 at all.22 "After a year of study and review, the Ne23 York State Insurance Department approved the24 transformation, creating a municipal bond-only insure

25 that hopes to raise enough capital to qualify for a26 AAA rating and begin insuring newly issued municip



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1 State Respondent-Holgado2 debt.3 "Thus we have created a sound basis for4 rebuilding the municipal bond insurance market."5 Again, here, your Honor, he makes this6 reference to the AAA rating and the understanding that

7 AAA was what you needed to write new business in this

8 particular industry.9 Your Honor, indeed, we can be even more10 contemporaneous than that. I'm walking you backwards

11 through to show you that this existed at the time.12 Let's actually go to the press release from13 the day after the approval letter was sent to MBIA14 where it was publicly announced that this approval had

15 occurred.16 This is the press release, your Honor. It17 says: "Municipalities and authorities have been18 searching for bond insurance in a marketplace where

19 only one insurer is currently active.20

"With the return of a solidly capitalized21 insurer with more than 30 years of experience" --22 that's MBIA, your Honor -- "we hope this will help23 reinvigorate the municipal bond market and help public

24 entities get easier, less costly access to credit."25 "This is the day that the transformation was26 announced to the world."

Page 806

1 State Respondent-Holgado2 Your Honor, we can go the day before, the day3 it was approved. We'll go back to Mr. Neustadt's

4 e-mail. I got his title in front of me now. It's5 deputy superintendent for public affairs. He still6 holds that position, your Honor.7 This is his e-mail, again, from the day that8 the transformation was approved where he makes the9 exact same point.10 He says: "Transformation helps strengthen the

11 municipal bond market, which is still very weak. Muni

12 bond issuers -- counties, towns, hospitals, sewer13 authorities -- will be better able to borrow again and14 help the economy by continuing to spend on vital15 infrastructure projects."16 Again, let's take -- why don't we pull the17 e-mail out. I hear some whispering here. Let's blow18 it up. Let's just put it up there. And this is MRX19 429.20 Okay, we're going to go to paragraphs 2 and 3

21 of this. Let's go to 2A first. 2A: "Why we did it."22 Why he did it; that sounds like -- these are the23 reasons for our approval.24 What he says under A is: "Helps strengthen25 municipal bond market, which is still very weak."26 Lets go down to 3: "What this means for the

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1 State Respondent-Holgado2 future."3 A and B are what we should read here. I4 says:5 "1, muni bond issuers -- counties, towns,6 hospitals, sewer authorities -- better able to borrow7 again."8 B says: "Help the economy" -- this is tha9 broader economy point, that sort of secondary poin

10 about when you help the muni market and help th11 issuers, that helps the economy because that woul12 stimulate it. That's what it says -- "by continuing 13 spend on vital infrastructure projects." Okay.14 So, finally, your Honor, in Mr. Buchmiller15 e-mails and memoranda to senior department staff prio

16 to transformation approval regarding -- these wer17 e-mails regarding the progress of his review -- the18 mention this in passing as well.19 Let's just take a quick look at one of thos20 Here's his January 30 e-mail, your Honor. This is21 quote.22 He says: "Public finance has slowed due 23 FGI and other financial sectors' distress. While 24 that time same time this distress has increased th25 need for public-sector borrowing."26 This actually should look familiar. The poi

Page 8

1 State Respondent-Holgado2 I was making yesterday about how these conclusions fro

3 the file memo -- do you remember we showed you the fi

4 memo just a few slides ago, making that point about th5 New York Unemployment Insurance Fund and how the publ

6 sector borrowing had become a need?7 That same conclusion is, here in this Januar8 30 e-mail which shows that was an evolution where h

9 was giving the upshot to the department of what h10 conclusions were in these e-mails before11 transformation, and in the file memo he just went in

12 greater detail, so it's the same long.13 Okay, I think we're done with that. So, yo14 Honor, I just alluded to this before that there wa15 this way to serve both the broader public interest an

16 the need to unfreeze the municipal bond insuranc

17 market, while at the same time doing something th18 would be constructive for MBIA's policyholders as

19 whole.20 So that's the next consideration that we wan21 to show you, is it's not just an after-the-fact22 argument by the lawyers, but here it is. It's slid23 150.24 It's raising revenue and attracting capital25 We have said this a few times yesterday and today26 Raising revenue and attracting capital for the benef



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1 State Respondent-Holgado2 of all policyholders within the MBIA holding company

3 system.4 Your Honor, Mr. Dinallo made this reasoning5 clear in his affidavit. We're going to start with the6 most recent -- I want to take you all the way back like

7 I did with the others.8 So here's Mr. Dinallo in his affidavit. He9 said: "I concluded that by creating a MBIA entity that

10 was able to write new business, the transformation11 would allow MBIA to further strengthen the capital12 position of its overall holding company system for the13 ultimate benefit of all of its policyholders."14 Again, your Honor, far from being newly minted

15 by Dinallo in his recent affidavit, this exact same16 reasoning was articulated by Mr. Moriarty in the17 affidavit that he provided way back in 2009, along with

18 the state respondent's answer. Here's what he said.19 This is paragraph 66 and 72 of Mr. Moriarty's20

affidavit. He says: "Prior to the transformation,21 MBIA Corp. was unable to write new business due to the22 market uncertainty and volatility caused by its23 exposure to structured finance policies.24 "The capitalization of National, through the25 transformation, creates the opportunity for26 National" -- this is where the muni policies are now --

Page 810

1 State Respondent-Holgado2 "the opportunity for National to attract outside3 capital and offer new policies in a domestic public

4 finance market that currently has a great demand for5 well capitalized FGIs.6 "National's ability to write new insurance7 and realize the premiums for such writings will8 substantially benefit all of the MBIA entity's9 policyholders by increasing MBIA Inc.'s"-- that's the

10 parent -- "overall financial strength, flexibility and11 access to the capital markets."12 This, your Honor, is an important point in13 part because of the next reason we'll get to, which is14 that Mr. Dinallo believed that keeping the policies in

15 the holding company system and keeping the money

16 associated with those policies in the system would be

17 an important thing.18 But not only that, that the additional capital19 that could be created could allow for the possibility20 of what he calls course corrections.21 We're going to get to that in a little bit,22 but first it's important to show that, again, Mr.23 Moriarty did not invent this rationale with his24 affidavit filed with our answer.25 In fact, prior to this Article 78 proceeding26 ever being brought and just a couple of months after

Page 8

1 State Respondent-Holgado2 transformation, your Honor, again, we want to show yo

3 here's something Mr. Dinallo said at this April 200

4 conference with hedge fund employees.5 This is slide 153. Here's what he says: "B6 the opportunity now to create, to attract capital7 including private capital, to either of the two8 business lines of MBIA, is there, where it was n9 there before because the books were so hopelessl10 mixed, that you didn't know whether you were making

11 municipal finance investment or a structured financ

12 investment."13 "And so I think that by doing that, approvin14 transformation, we are now able to go to privat15 investors, to see if there's some way to uplift th16 ratings on either or both sides."17 What I want to note here with all these18 brackets, your Honor, is in the same context as talki

19 about this possibility of attracting private capita20

and private investment to MBIA, that he was21 simultaneously talking about the Federal assistanc22 that could potentially be provided.23 So this quote might look a little familiar 24 you. I know it looks a little hacked up, but what he25 actually talking about is both things at once.26 This is just for your benefit to show that

Page 8

1 State Respondent-Holgado2 he's talking about each of these things, that, not onl3 did the Federal government provide assistance to bo

4 sides, but so to private capital.5 We can go back even further, your Honor. W6 can go back to Mr. Buchmiller's file memorandum whic

7 was prepared in the weeks, as you know, followin8 transformation approval in order to document, again,

9 memo to file, whose purpose was to document the work h

10 performed and the conclusions he reached, again, not

11 relay those conclusions.12 That might be something Mr. Giuffra and I nee

13 to argue about at a later date, but this is to14 memorialize those things.15 Here's what he said. He said: "Policyholde16 have been hurt by ongoing concerns about FGI solvenc

17 and market uncertainties, thus making the timeliness 18 our decision on transformation, potentially of tangib

19 benefit to all existing policyholders, both publi20 finance and structured finance."21 So he understood that as well, your Hono22 Let's go back again to our favorite e-mail from M23 Neustadt on the date of the transformation approva

24 Ironically, your Honor , the first showing o25 this document in this case was Mr. Giuffra offering

26 as evidencing somehow the bias of the departme



8/77

v.May 22, 2

Page 813

1 State Respondent-Holgado2 against the structureds.3 As we showed you late in the afternoon4 yesterday, one of the things in this very document is

5 that it says they're going to help the structure.6 In any case, this is it. So here's what this7 says here: "MBIA's goal is to eventually be strong8 enough to write new business separately in both muni9 and structured markets."10 So there was a desire from the department,11 your Honor, and there was a belief that transformation

12 would enhance the overall financial strength of all of13 the entities within the MBIA system.14 Indeed, your Honor, to see that the department

15 had an interest in raising revenue and attracting16 capital for MBIA and for other FGIs even for the17 benefit of their policyholders, not for themselves but18 for their policyholders, your Honor can look all the19 way back to January 2008, when the department announced

20

its three-point plan to deal with the issues facing21 FGIs as a result of the subprime crisis.22 Here's what they said in that release, your23 Honor: "The department has implemented a three-part

24 plan to help FGIs, including to help them attract more

25 capital and increase capacity to protect policyholders.

26 "Specifically, the department approved the

Page 814

1 State Respondent-Holgado2 capital-raising plan for MBIA and is currently in3 discussions with other parties about possible future

4 capital investments."5 So, your Honor, over a year before6 transformation was approved, the department was already

7 having as its focus a desire to -- we talked about it8 in part of the measured response, that that was one of9 their first steps after assessing the financial10 condition of FGIs, was to see if they could facilitate11 infusions, capital infusions.12 This transformation had, your Honor, as one of13 its purposes facilitating just those types of private14 capital infusions.15 So, your Honor, it's clear that all the way16 back even to January 2008, before the transformation

17 was a glimmer in anyone's eye, the department had these18 concerns and had these kinds of reasons in its mind.19 Let's move on to the last thing which I20 alluded to, this course corrections thing. Now, in21 approving the transformation application, your Honor,

22 Mr. Dinallo has stated that he also considered the fact23 that these assets that were formally in MBIA Corp.24 would remain within the MBIA holding company system

25 following the transformation and that that would allow

26 the department to make adjustments later on if it was

Page 8

1 State Respondent-Holgado2 necessary in order to protect the structured financ3 policyholders.4 That's important, your Honor, because th5 alternative would be to go outside to an unrelate6 third party for the reinsurance of these policies an7 to essentially place the assets associated with thes8 policies outside the reach of the MBIA holding compan9 system and MBIA Corp. in particular.10 Here's how Mr. Dinallo explained that. Th11 is in his affidavit, your Honor: "In approving th12 transformation application, I also considered it13 important that both MBIA Corp. and National woul

14 remain subject to the deposition's regulatory oversig

15 following the transformation.16 "As a result, if, in later years, MBIA17 Corp.'s ability to pay its claims as they came due we18 to be called into question, the department would b19 able to use its regulatory oversight powers to prote

20

MBIA Corp.'s structured finance policyholders21 "These powers included the ability to22 withhold approval of the payment of dividends fro

23 National to MBIA" -- that's the parent. They're bo

24 affiliates, your Honor, and daughters of essentiall25 MBIA, Inc. They're sisters to each other.26 "These powers included the ability to withho

Page 8

1 State Respondent-Holgado2 approval of dividends from National to MBIA Inc., an

3 the ability to disapprove MBIA Corp.'s payments o

4 interest on its surplus notes.5 "This consideration provided me addition6 comfort in approving the transformation."7 Your Honor, Mr. Giuffra asked Mr. Dinall8 about this justification at his deposition, and here9 what he said at the deposition.10 He said: I do have a distinct recollection o11 meeting with a large group of hedge funds. I d12 explain something which I don't think they appreciate

13 until I raised it, which was my belief that there wa14 the ability to essentially make changes in15 capitalization if it was later learned or develope16 that there was insufficient capital."17 That means insufficient capital left in Cor18 He says: "So I discussed with them the19 ability to trap excess surplus dividends or other20 dividends.21 "I remember specifically saying that if22 National really took off and started to generate a lo23 of revenues, and at the same time or at any time 24 appeared that the structured policyholders in Corp25 were not receiving sufficient capital, that the26 department could either shunt or demand or preven



9/77

v.May 22, 2

Page 817

1 State Respondent-Holgado2 capital from leaving the company to satisfy those3 claims."4 By "the company," he means National.5 "I said it wasn't explicit in the approval,6 but that I, as the regulator, was certain about it, and7 it was in my mind when I granted it." "When I granted"

8 the approval.9 Your Honor, this hedge fund meeting that he's

10 referencing, we actually have already shown you a few

11 quotes from the transcript of that meeting. That's the

12 April 2009 meeting. That was a transcript that was13 reported in Thomson Reuters.14 Again, this shows that this is not just a post15 hoc rationalization by the state respondents because he

16 made these exact statements at that April 200917 conference.18 Here's what he explained at that conference,19 your Honor. He said -- again, this is before the20

petition is even filed, and this is just two months21 after transformation.22 "And if we are wrong, we have the ability to23 capture revenue stream to fix that, which a lot of24 people don't know, because, look. You have a holding

25 company. We have the ability to basically shut off26 that flow if it's a dividend in excess of 10 percent."

Page 818

1 State Respondent-Holgado2 That makes it an extraordinary dividend, your3 Honor, and there's that power under section 4105.

4 It continues: "And so the fact that somehow5 people think that this is a completely done experience

6 is simply not true."7 Now, your Honor, Mr. Dinallo also testified8 that he had discussed this concept with Mr. Brown, the

9 CEO of MBIA, and that, certainly in Mr. Dinallo's mind

10 at least, he believed that Mr. Brown understood what

11 Mr. Dinallo himself knew, that the department had the

12 power, either formal or informal, to make these sorts

13 of adjustments in a situation like this.14 Here's his testimony at his deposition about15 that. The question from Mr. Giuffra:16 "So it is your recollection that Mr. Brown17 indicated to you that he understood that the department18 had regulatory powers by which it could require19 National or MBIA, Inc. to put capital into Corp. in the

20 event that Corp. did not have sufficient funds to pay21 policyholders post transformation?"22 Mr. Dinallo responds: "I don't know if he23 actually said that. I think he acknowledged my24 position around having those powers.25 "He did at one point say there could be course

26 correction, which I guess you could argue was an

Page 8

1 State Respondent-Holgado2 adoption of that."3 Now, consistent with Mr. Dinallo's4 recollection, your Honor, Mr. Brown did actually sen

5 Mr. Dinallo an e-mail prior to the transformation tha

6 at the very least, indicates that Mr. Dinallo was tol7 by Mr. Brown that he recognized the superintendent

8 powers or, at least in Mr. Dinallo's interpretation 9 that e-mail, that's how he understood it.10 Here's what that e-mail says: "As both11 President Obama" -- again, this is a week befor12 transformation.13 "As both President Obama and Secretary Geitn

14 said today, the time is now to take action, even if w

15 have to make some course corrections later in respons

16 to new information."17 So, again, far from an after-the-fact18 rationalization, your Honor, these contemporaneou

19 documents show that Mr. Dinallo's reasons for approvin

20 the transformation undoubtedly included the notion th

21 the department, through its regulatory oversigh22 powers, both express and implied, could continue t

23 monitor MBIA Corp.'s financial condition following th

24 transformation, and could direct other entities withi25 the holding company system, including National, 26 provide MBIA Corp. with support if it became necessa

Page 8

1 State Respondent-Holgado2 to do so.3 Here I think, again, it's worth underscorin

4 the difference between a transaction like the5 transformation and had they instead done something lik

6 what was done with FGIC, your Honor.7 "With FGIC, FGIC, another FGI that wa8 experiencing some distress, and they wanted to have

9 reinsurance agreement in order to separate the mun

10 policy liabilities from the structured, what was don

11 with the FGIC reinsurance agreement that was entere

12 into between FGIC and MBIA.13 "This was in 2008. MBIA was a relativel14 healthy and strong FGI who was viewed as someone wh

15 could help that situation.16 "Indeed, MBIA probably did okay on tha17 transaction, your Honor, but the point is that what w18 done was these assets associated with the municipa

19 policies in connection with the reinsurance agreeme

20 were also transferred out of FGIC and into a separa21 FGI."22 Your Honor, what Mr. Dinallo is saying, h23 said that once you do that, you're not going to g24 MBIA to give some money back to FGIC in the event th

25 there is some need to do that.26 What he's saying here is that when you do



10/77

v.May 22, 2

Page 821

1 State Respondent-Holgado2 in the context of the transformation, and you keep it3 within the holding company system, there is more of an

4 ability of the regulator to direct either through5 formal or informal means, perhaps a reallocation at6 some later date.7 Now, the banks, your Honor, pointed to some8 deposition testimony from Mr. Brown that he didn't ever9 agree with Mr. Dinallo that National would contribute

10 capital to MBIA Corp. down the road if it became11 necessary to do so.12 He did not have, quote, unquote, "an13 understanding" with Mr. Dinallo to this effect.14 But, again, your Honor, the banks are trying15 to create a conflict in testimony where there simply16 isn't one.17 As you saw from what we showed you on the18 screen, Mr. Dinallo was not testifying that he had some

19 sort of formal agreement with Mr. Brown.20 In fact, what Mr. Dinallo was saying was that21 he didn't need any agreement with Mr. Brown or with22 MBIA. In his view -- and it seems to be the correct23 view -- he and his successors in fact have that power

24 and had that power whether MBIA agreed with them or

25 not.26 Now, moreover, your Honor, the banks in this

Page 822

1 State Respondent-Holgado2 case have made much of the fact that, as reported by3 The Wall Street Journal, I believe, MBIA Corp.'s

4 settlement with one of the former petitioners in this5 case, Morgan Stanley -- they're no longer a petitioner6 because of the settlement -- that that settlement was7 funded by a loan from National.8 Mr. Giuffra cites this fact as a demonstration9 of Corp.'s supposed present insolvency. There is no10 basis to that.11 Of course, everyone is well aware that a large12 amount of Corp.'s booked assets at this time relates to13 billions of dollars that it believes Bank of America14 owes it in connection with pending put-back claims.

15 That's a position that has been signed off on,16 by the way, by MBIA's independent auditors at least two

17 times now, but in any event, that's not what this case18 is about, your Honor.19 This case is about the department and its20 determinations regarding MBIA's post transformation21 solvency.22 THE COURT: That's being tried next door.23 MR. HOLGADO: It is. It is, your Honor.24 But this case, as you know, is about the25 department's determinations about MBIA's post26 transformation solvency under the Insurance Law at the

Page 8

1 State Respondent-Holgado2 time of the transformation.3 So we're not as concerned about that here, bu

4 more importantly, the fact that this loan was mad5 itself proves that this ability, your Honor, for cours

6 corrections was not mere speculation on Mr. Dinallo

7 part but, rather, a sensible consideration.8 The fact that there was the ability to acce9 these assets was a sensible consideration in10 determining to approve transformation.11 He believed that by keeping those assets12 within the holding company system, they could b13 utilized later if necessary.14 Here it wasn't given back. It was a loan, b15 it could be utilized. And, indeed, your Honor, the16 were.17 Finally, your Honor, on this point, the bank18 own expert, James Corcoran, former superintendent, ha

19 previously contended that superintendent has thes20 exact same powers that Mr. Dinallo has been referri

21 to.22 In another case, your Honor, involving23 Frontier insurance company, Mr. Cork argued tha24 Frontier's parent holding company, Frontier Insuran

25 Group, could be compelled to contribute capital to i

26 even though Frontier Insurance Group, the holdin

Page 8

1 State Respondent-Holgado2 company, is not itself an insurer under the direc3 regulation of the department.

4 Let's actually take a look at that testimon5 that Mr. Corcoran gave in the Frontier case:6 "Question -- this isn't Mr. Giuffra this tim7 or us. This is a different case, your Honor.8 MR. GIUFFRA: Are you going to put up M9 Corcoran's testimony?10 MR. HOLGADO: Yes, I am, right after th11 MR. GIUFFRA: Okay, good.12 MR. HOLGADO: So this, by the way, is a13 exhibit that was used at Mr. Corcoran's deposition, s

14 it's in the record, your Honor. And here's what th15 question was to Mr. Corcoran in this earlier cas16 regarding Frontier.17 "Question: What specific ability did the18 superintendent have to require Frontier Insurance Grou

19 to make a capital contribution to Frontier Insuran20 Company?"21 The group is the holding company. The compan

22 is the company, the operating company.23 Mr. Corcoran says: "Well, look at Article 24 of the New York State Insurance Code. It provides hi

25 with that authority."26 Then the question continued, your Honor



11/77

v.May 22, 2

Page 825

1 State Respondent-Holgado2 "Question: And what procedure would the3 superintendent take to compel Frontier Insurance Group

4 to make a capital contribution to Frontier Insurance5 Company?"6 Mr. Corcoran answered: "There are many7 avenues. You can simply call the company in, explain

8 to them, we've done an examination. You have not9 maintained the records and do not comply with the10 requirements that you do so.11 "Now, you can do one of two things. You can

12 make the contribution, or I am going to take you into13 rehabilitation, and then we'll make the contribution."

14 Now, your Honor, it's worth pausing for a15 second there. He's referencing some powers that are

16 actually expressed in the Insurance Law. These are --

17 he's tying them to this informal ability to influence18 what companies do, but he has direct powers as well

19 over the operating company, and he's referring to some

20

of them here.21 In fact, over the holding company, he even has22 the power under Article 15 to require them to show23 books and records regarding finances and things.24 With respect to taking you into25 rehabilitation, your Honor, that's referring to his26 powers under Article 74 of the Insurance Law to --

Page 826

1 State Respondent-Holgado2 there are various grounds, your Honor, that can be3 cited and that would be basis for taking a company into

4 rehabilitation.5 It's not just you're insolvent. You're going6 in. It's also -- it's been established that perhaps7 you're not being forthright with us, you refuse to8 remove some officers and directors that aren't doing9 what we tell them. You're not showing us your books

10 and records. These types of things can be grounds to

11 take a company in under Article 74.12 So the stick of that, your Honor, can create13 in its own right informal ability to actually get the14 company to do things that maybe aren't expressed in the

15 Insurance Law.16 So, your Honor, I think it's actually17 noteworthy. Let's actually show Mr. Corcoran's18 deposition on that. Let's go to slide 197. He was19 asked, your Honor --20 MR. GIUFFRA: Your Honor--21 MR. HOLGADO: Let me finish this. Then we'll22 do it.23 MR. GIUFFRA: Your Honor, I've been very24 quiet. He's putting up slides the whole day. He's not

25 putting up many original documents. We put up a lot of

26 original documents.

Page 8

1 State Respondent-Holgado2 If he's going to quote from one of our3 experts, he ought to put up our expert's testimony, a

4 I would say --5 THE COURT: I don't think he has to put u6 everything. I mean, again, you can respond to 7 He's putting up -- he's stating where it's from, an8 he's saying it's an excerpt.9 Obviously, it's not the whole document. 10 can't tell him how to do these slides. But if the11 was really some kind of a conflict, there is somethin

12 you need to point out, fine, but, otherwise, he ca13 show what needs to show, and you can do it on you

14 reply.15 (End of take 2)16 (Continued on next page)17181920

212223242526

Page 8

1 PROCEEDINGS - HOLGADO2 T3 MR.HOLGADO: Your Honor, I am happy to put this3 a little bit better context. I am sure Mr. Giuffra w

4 take care of that on surreply -- sorry, during his rebutta5 I keep thinking there is more grounds for briefing6 Here is the testimony, your Honor, the questio

7 was, and you agree, I think you just testified that Fronti

8 is analogous to this situation and Mr. Corcoran said9 believe they are analogous to this situation.10 To be fair, Mr. Corcoran is asserting that11 apparently the wrongful conduct that happened between th

12 Frontier Company and its holding company that Mr. Corcora

13 was testifying about in that case, that he thought he coul

14 exercise these powers in order to, you know, force them t

15 do things such as, you know, showing me your books an

16 records, and he is saying somehow that's analogous to how

17 MBIA was treating its own subsidiaries in a way that someho

18 was inappropriate.19 Now, Mr. Giuffra can show all that testimony if h

20 wants. I think it's specious, but that is certainly th21 context of why Mr. Corcoran said this. In any case, you

22 Honor, we don't have to rely just on that.23 We can point to the fact that the current24 Superintendent of the Department, which is now Th25 Department of Financial Services, recently used its inform

26 powers to convince the executives of MBIA Inc., a compan



12/77

v.May 22, 2

Page 829

1 PROCEEDINGS - HOLGADO2 again which is a holding company, your Honor, and MBIA Inc.

3 and not under his direct regulatory authority, he convinced

4 them to agree to forego bonuses.5 There is, of course, no provision in the Insurance

6 Law that provides that he can force them to forego bonuses,

7 but he was able to do it anyway.8 Again, your Honor, this is clear that the9 Department then had various, entirely proper bases for10 approving the transformation and indeed, had these bases at

11 the time it approved the transformation.12 Here, they are. MBIA Corp would pay its claims as

13 they came due and again, embedded in that, your Honor, as

14 based on that finding, they therefore complied with the

15 various provisions of the Insurance Law at issue.16 Secondly, that the transformation transactions were

17 simultaneous. To see that, you don't have to just look at

18 Mr. Dinallo's testimony and Mr. Moriarity's repeated19 testimony in that regard, but the application itself, your

20

Honor.21 Three, that Mr. Dinallo and the Department22 considered the fact that they could create an opportunity

23 for Federal assistance for all of MBIA policy holders,

24 including the banks, who he was actually trying to help,

25 your Honor, was also a pre hoc basis.26 But, in addition, your Honor, that unfreezing of

Page 830

1 PROCEEDINGS - HOLGADO2 the municipal bond insurance market and in order to aid the

3 broader economy is also a reason, and it's simultaneously,

4 your Honor, that the same, the same effort to do so would5 also help MBIA to raise capital and revenue for the benefit

6 of its entire holding company system and thereby, all of its

7 policy holders and then finally, your Honor, your Honor, the

8 fact that keeping these assets within the holding company

9 system with the reinsurance transaction, rather than sending

10 them out to a third-party, who would not be able to be in

11 any way, informally or formally required to assist, if12 course corrections later became necessary.13 These were all bases that the Department is not14 only offering three years later, but the documents and

15 records show, bases they had at the time they approved the

16 transformation. The banks' suggestions to the contrary are

17 baseless.18 Your Honor, now, I am ready now to move onto a

19 brief discussion of the experts in this case that have been

20 offered and, in particular, by the banks. If your Honor21 would like, I can continue or we can take a break. It's up

22 to you.23 THE COURT: Up to you.24 MR.HOLGADO: I can keep going. So let's go.25 Now, after the lengthy argument that has been had

26 before your Honor, including in the briefs, the in limine

Page 8

1 PROCEEDINGS - HOLGADO2 briefs in this case about whether or not the various expe

3 affidavits submitted by the banks, including from the

4 former Superintendents, Mr. Corcoran, Mr. Serio, M

5 Stewart, Mr. Muhl, that your Honor, the arguments we h

6 about whether or not those affidavits should be considered

7 after all of that argument, I expected the banks to spend

8 least some of their presentation to your Honor, for th9 three days they spent here, offering up the various leg

10 conclusions that these various Superintendent's ha11 offered. They did not do so, your Honor.12 Nonetheless, this is supposed to be an oral13 argument on the papers that the parties have submitted

14 you in connection with the petition, and given that th

15 great majority of those papers submitted by the bank

16 consisted of these expert affidavits, I would like to,

17 least, briefly address them while again, referring you18 Honor to the State Respondents' briefs for perhaps a mor

19 full discussion and not just our, not just our brief20 surreply brief, your Honor, but also the pre hearing motio

21 to exclude briefs that we submitted on May 4th to you

22 Honor.23 Here is sort of an organizing principle for th24 experts and, in particular, the former Superintende25 experts and Mr. Goldin, your Honor, who I will mention in

26 moment. Slide 166.

Page 8

1 PROCEEDINGS - HOLGADO2 This is the black letter law on this, your Hono3 probably need not be restated, but I will briefly resta

4 it.5 "An expert may not be utilized to offer an opinio

6 as to the legal standards which he believes should hav

7 governed a party's conduct."8 Your Honor, as we have made clear in these papers

9 just referred you to, each of the former Superintendent

10 offered by the banks, their opinions in this case do nothin

11 more than this -- they offer opinions, your Honor, as to th

12 legal standards which they believe should have governed M

13 Dinallo's and the Department's conduct.14 Now, how they primarily do that, your Honor, is b

15 offering the Court their own interpretations of what the

16 key provisions of the Insurance Law that we are talki

17 about, what they mean. But worse than that, they g18 further and they offer up to your Honor, duties an19 obligations that the Department supposedly had in connectio

20 with their transformation review, but that are no where

21 be found in the Insurance Law. Procedural requiremen

22 regarding hearings and notice and the amount of resource

23 and the number of examiners to use, that finds no basi

24 your Honor, in the Insurance Law.25 So, in addition to offering your Honor lega26 conclusions, they are offering you incorrect ones, bu



13/77

v.May 22, 2

Page 833

1 PROCEEDINGS - HOLGADO2 rather than wade into that further, we believe your Honor

3 should simply disregard these opinions all together.4 Your Honor, I think the same principle holds true

5 for the recently submitted affidavit by Petitioners. It's

6 one of their two new experts in their sur-sur reply papers

7 and that's former Comptroller Harrison Goldin, former New

8 York City Comptroller Harrison Goldin, at his deposition,9 Mr. Goldin admitted that the sole reason that he was being

10 offered as an expert, was to provide an opinion on the

11 ultimate issue in this case -- I don't have a slide for12 this, but I have the deposition reference. I will read it13 to you or we can put it up.14 Here is what he said. "I am being offered to15 explain to you, as I describe in my affidavit, that the16 record on which the Department rendered its conclusion did

17 not provide a rational basis for a reasoned decision."18 That's the question your Honor is here to answer,19 whether the Department's approval was rational, whether it

20 had a rational basis under C.P.L.R. 7803, subdivision 3.

21 Mr. Goldin says that's the reason that he is here, to tell22 you that it should find it was not rational.23 I think your Honor has that under control. So,24 your Honor --25 MR. GIUFFRA: Your Honor, can we get a page cite26 for that?

Page 834

1 PROCEEDINGS - HOLGADO2 MR.HOLGADO: Certainly.3 MR. GIUFFRA: He is overstating what Mr. Goldin

4 said in his affidavit. He is overstating what is said in5 the deposition.6 THE COURT: He will give you the page number.7 MR.HOLGADO: I will give you the page cite. If you8 want to talk about this on rebuttal, it's fine. It's page9 360, line 20 to page 361, line 3. I directly quoted Mr.

10 Goldin from the those lines.11 So, your Honor, as we noted in our surreply brief,

12 the banks' Superintendent experts and Mr. Goldin are, sorry,

13 not Mr. Goldin, just the Superintendent experts, are14 improper for additional reason, and especially to the extent

15 that the banks have attempted to offer their testimony as to

16 the procedures they used during their respective tenures as

17 Superintendent.18 In other words, they offered up, in my day, this is

19 how we did things. This is how we would handle a20 transaction like this. This is how the Department does

21 things. I know because I was there, I was the22 Superintendent. As a matter of fact, I can tell you this is

23 exactly what we used to do.24 And, because such testimony, your Honor, is really

25 in the nature of fact testimony and because these26 Superintendent's have been paid substantial sums for this

Page 8

1 PROCEEDINGS - HOLGADO2 testimony, there is additional improper reason, reason t

3 disregard their testimony, your Honor. Indeed, M4 Corcoran himself was paid $1.2 million to give his expe

5 testimony in this case.6 Here is --7 THE COURT: Honestly, in all cases, experts a8 always paid, so that's not a reason to discount what the9 say necessarily. Everybody gets paid.10 MR.HOLGADO: Agreed, your Honor. To the ext11 they are testifying as experts, I completely agree12 What we are saying is that they went out and chos

13 these experts because of the hope they could provide som

14 sort of an imprimatur of giving your Honor fact testimon

15 about the Department's past practices and procedure

16 Why not get a law professor or some expert 17 say -- Wisconsin regulator, to come in and say here is ho

18 they should have done it. No, that's not what they di

19 They got some Department Superintendent's to say, here

20

how New York does it.21 That, your Honor, is on the line of either it22 improper expert testimony or, because it's legal conclusio

23 or it's this other thing. We want to offer it for factu24 context or just to suggest these facts exist about how th

25 Department did things. Here is what the cases say on tha

26 your Honor.

Page 8

1 PROCEEDINGS - HOLGADO2 It's the Caldwell case. "Payments to fact3 witnesses under which witnesses might be permitted to exto

4 unreasonable fees for their testimony portend to erode equ5 access to justice, create an incentive, even unconsciou

6 toward bias testimony, and threaten the integrity of th

7 judicial system by giving the appearance that justice is

8 commodity.9 Now unfortunately, your Honor, the paid fa10 witnesses perhaps don't stop there. The banks recently,

11 their opposition to our motion in limine seeking to exclud

12 all of their expert testimony, they made what could b13 thought of as a judicial admission that reveals that M

14 Paltrowitz of Black Rock II is apparently being proffere

15 to some extent, as a paid fact witness.16 There is a heading in the brief, your Honor.

17 was entitled Mr. Paltrowitz' testimony is of independen18 relevance, regardless of MBIA's challenges to his expertis

19 Essentially, regardless of his expertise, he has independe

20 relevance to you as a witness. Here is what they say abo

21 why.22 This is from their omnibus opposition brief23 submitted Friday before this hearing. The analysis o24 MBIA's portfolio prepared by Black Rock under M25 Paltrowitz' supervision is of independent relevance to th

26 dispute, because Mr. Paltrowitz will explain the analyse



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v.May 22, 2

Page 837

1 PROCEEDINGS - HOLGADO2 and information that Black Rock would have provided in

3 February of 2009 had it been retained by MBIA or the

4 Department to analyze the expected losses in portions of

5 MBIA's structured finance portfolio.6 Black Rock used only data that was available at the

7 time and employed the same methods and assumptions that it

8 would have used at that time.9 What they are trying to say, your Honor, Black Rock

10 is not Monday morning quarterbacking and again with the

11 football references. I apologize.12 THE COURT: I like football.13 MR.HOLGADO: Good. What they are saying to your14 Honor, Black Rock is not here Monday morning quarterbacking.

15 They were there on Sunday too, and here is what they would

16 have done. Here is the place they would have called. Here

17 is the analysis they would have given at the time.18 Now, we don't agree, we don't agree you can call19 that relevant, from a fact perspective, because of how

20

speculative it is.21 So, going back in time, putting blinders on,22 pretending you are giving an opinion two or three years23 later with no benefit of the hindsight, and pretending you

24 are not considering these things in your analysis is, we25 think, a stretch and that therefore, the notion that it has

26 independent relevance is a stretch.

Page 838

1 PROCEEDINGS - HOLGADO2 But, your Honor, I want to double back and say that

3 during their presentation to the Court, the banks, the

4 important point is that they are saying, it's relevant fact5 testimony. Your Honor, in fact, during their presentation

6 to the Court, the banks carted out that November 2008 e-mail

7 from Hampton Finer and if we can show PX 413, this is from

8 Hampton Finer, November 13th, 2008, which the banks make

9 much of.10 They say, he suggests here in passing that some11 people have used Black Rock with some success in suggesting

12 that maybe MBIA would want to retain an evaluation provider

13 itself. In passing he said, they might want to consider

14 that.15 Somewhat shockingly, Mr. Steinberg argued during

16 the banks' presentation that, the fact of this e-mail was

17 the very reason why the banks went out and retained Black18 Rock as an expert.19 They also made a point, your Honor, in noting that

20 in the course of inquiring of the various financial21 institutions about loss modeling and how they did it, Mr.

22 Buchmiller spoke to Mr. Paltrowitz of Black Rock in23 particular. It's a big company, but that's the guy he24 spoke to? Who is the expert they offer? Is that guy, Mr.

25 Paltrowitz.26 Now, your Honor, you know, we think again it's

Page 8

1 PROCEEDINGS - HOLGADO2 quite a stretch that this has independent relevance oth3 than as expert testimony as the banks are suggesting. Bu

4 the banks are suggesting, and what we want to know, you

5 Honor, if the banks thought it was relevant fact testimon

6 why didn't they simply subpoena Black Rock to obtain th

7 information? That's what they did with Bridge. That

8 what they did with Perella Weinberg. That's what they d9 with Fried Frank, your Honor.10 I guess, why subpoena Black Rock, to answer tha

11 question of what they would have said at the time, when y

12 can pay them $7 million to do so.13 Having done this however, your Honor, the ban

14 have completely discredited the testimony that they ha

15 paid for. Indeed, your Honor, the Caldwell opinion16 particularly applicable to Mr. Paltrowitz' testimony, whic

17 Petitioners assert has supposed independent relevance18 Now these, your Honor, are all merely addition19 reasons why the Court should disregard the expert testimon

20 that the banks have offered in this case. There is real

21 only one reason that your Honor needs to do so and it

22 reasons that have been suggested, even by MBIA and in the

23 recent papers, and it's the principle that your Honor

24 not, herself, here to second guess the administrativ25 agency's determinations, and it certainly should not be fo

26 a battle of experts to determine.

Page 8

1 PROCEEDINGS - HOLGADO2 As your Honor yourself noted at the April 203 conference, it's not whether what he did or what he did wa

4 better, but whether what we did was rational. Here is th5 law that supports that directly, your Honor.6 These are both from the First Department, Rooseve

7 Islanders, where the First Department stated it's not th8 role of the Court to weigh the desirability of the propose

9 action, choose among alternatives, resolve disagreemen

10 among experts or substitute it's judgment for that of th

11 agency.12 Earlier, your Honor, the First Department in McCab

13 said something similar. It is not for the Courts to choos

14 between diverse professional opinions, as that is th15 function of the proper Department heads, and as long as the

16 act reasonably and responsibly, the Courts will n17 interfere.18 Your Honor, with that, I would actually sugge

19 that we take a break because I have reached a good stoppin

20 point.21 Can we take a brief recess?22 THE COURT: Absolutely.23 (Recess taken.)24 THE COURT: Okay.25 MR.HOLGADO: Good morning still, your Hono26 Ready to proceed?



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v.May 22, 2

Page 841

1 PROCEEDINGS - HOLGADO2 THE COURT: We are ready.3 MR.HOLGADO: Your Honor, I now actually would like4 to turn to what I have sort of grouped together as, and this

5 is sort of the final part of my presentation, but it may6 take a few hours, is what I am calling Petitioner's red7 herrings, their red herring arguments, your Honor.8 That's exactly what they are, your Honor, things to9 distract your Honor on all of the things I have been10 focusing on the last day and a half. Perhaps the biggest

11 of all of those distractions, your Honor, is attempt by the

12 banks to characterize an analysis that MBIA had in its files

13 from Lehman Brothers in 2008, who had been retained by MBIA

14 to assist MBIA in its negotiations with structured finance

15 policy holders, on possible commutations.16 Lehman, in the course of that retention, a17 retention in which Lehman was incentivized, your Honor, to

18 obtain these successful commutations by a fee that was based

19 on those commutations being successful, essentially20 $5 million to Lehman for each commuted policy that they were

21 able to commute.22 Lehman, in the course of that negotiating on behalf

23 of MBIA, prepared an analysis of MBIA's ABS CDO policies and

24 expected losses with respect to those policies. And, the

25 banks have carted this out, your Honor, and shown how this

26 analysis suggests much greater losses on those ABS CDOs, in

Page 842

1 PROCEEDINGS - HOLGADO2 particular, the Broderick ABS CDOs -- like Matthew3 Broderick. The Broderick CDO was one of the 15, and that

4 the Lehman analysis that was used in connection with those5 commutations, and suggested greater losses than MBIAs own

6 analysis did.7 Now, Mr. Kasowitz will probably talk some about8 that and how the purpose for which that was prepared might

9 be relevant to putting into context what that analysis says

10 and I may address some of those issues in greater detail,

11 but the only thing I want to underscore about the Lehman

12 analysis that -- and I alluded to this at our April 20th13 conference as well -- once your Honor strips away from this

14 particular document and from this whole issue of whether

15 MBIA had this in its files and whether they somehow

16 wrongfully concealed it from the Department, those are

17 issues again, that your Honor has quite rightly said are not18 part of this case at all, but rather, the only thing you19 care about what was before the Department and whether what

20 the Department did was rational.21 Once that is all stripped away, your Honor, this22 Lehman analysis is simply one prediction from one financial

23 institution and it's in that regard, your Honor, it's simply

24 one data point along a vast spectrum or vast continuum of

25 predictions of the future. The evidence shows, your Honor,

26 that the Department was already well aware of this continuum

Page 8

1 PROCEEDINGS - HOLGADO2 of this diversity of opinion.3 Now, let's talk about why we know that. First,

4 part of his review of MBIA's loss modeling methodologie

5 Mr. Buchmiller inquired into the methodologies of a wid

6 range of market participants, including other FGIs, but als

7 including rating agencies and other financial institution

8 and he accounted for in his analysis.9 Mr. Buchmiller also acknowledged, your Honor, th

10 there were of course, differences among these methodologie

11 different answers, different predictions generated as

12 result of these differing methodologies. But, he st13 ultimately concluded, your Honor, that MBIA's loss modelin

14 was not only analytically sound, but consistent with be

15 practices of these financial institutions and other marke

16 participants.17 In fact, let's look at his testimony. Slide 1718 Here is what he said: "In connection with m19 transformation review, I spoke generally with variou

20 financial consultants, including Black Rock Solutions abou

21 how they modeled structured finance transactions in order

22 insure that MBIA Corp's models were in conformity with FG

23 and other financial industry best practices.24 "Based on these discussions, and my own extensiv

25 review of MBIA Corp's loss modeling, I concluded its lo

26 modeling conformed to best practices."

Page 8

1 PROCEEDINGS - HOLGADO2 Now, he testified also, your Honor, in the sam3 affidavit to his meeting with Moody's, the rating agency, o

4 February 13th, 2009. This is before the approval agai5 your Honor. Here is what he said.6 "On February 13th, 2009, I met with representative

7 of Moody's to discuss their review of RMBS. In advance

8 the meeting, I corresponded with Mr. McKiernan concernin

9 Moody's loss modeling approach and how it differed from th

10 of MBIA Corp. I also studied some recent publications

11 Moody's concerning its modeling methodology.12 "Nothing from this meeting or my review of th

13 Moody's publications led me to question the analytica

14 soundness of MBIA Corp's loss modeling methodologies or t

15 conclude that these methodologies were inferior to tho

16 used by Moody's."17 Now, your Honor, Mr. Buchmiller made these sam18 points again. They will say this is post hoc, just M19 Buchmiller now, but he was making these same points in h

20 file memorandum where he memorialized, just weeks aft

21 transformation, his conclusions and the work he performe

22 Here is what he said in that memo.23 In RMBS modeling generally, this is 2802, in RMB

24 modeling generally, i.e., among other Monolines, investor

25 vendors, et cetera, again not limiting the FGI modeling, b

26 in RMBS modeling generally there are two fundament



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v.May 22, 2

Page 845

1 PROCEEDINGS - HOLGADO2 approaches, a macroeconomic and/or statistical analysis3 based on economic trends and an analysis based on loan level

4 characteristics or modified roll rate procedure.5 Currently, monolines mostly used the latter. We are aware

6 of only a few vendors and practitioners using the former

7 method.8 In 2825, in the same memo, your Honor, Mr.9 Buchmiller states: MBIAs fundamental loss modeling approach

10 is correct or at least reasonable and among best practice

11 based on our knowledge of other FGI practices and meetings,

12 sorry, and meetings, research and/or presentations by these,

13 are not FGIs -- Andrew Davidson & Company, Rudder

14 Associates, New Oak Capital and other acknowledged experts,

15 despite differences among them.16 Again, your Honor recognizes here the vast17 continuum of opinion and that they may differ as to their

18 predictions and results, but MBIA modeling methodologies

19 were still nonetheless consistent.20

MR. GIUFFRA: If I can be heard?21 He put up on the 2802. We don't have -- we don't22 have the original documents here, but the Moody's23 discussion. The actual document --24 THE COURT: I guess -- there is the original25 document.26 MR. GIUFFRA: There is the original. He is

Page 846

1 PROCEEDINGS - HOLGADO2 relying on it to support his case. It says "our meeting3 with Moody's RMBS analysis on 12/13/09." I think that's

4 what he was just talking about, was inconclusive on this5 point. They said, they developed individual roll rates

6 redacted -- I meet with FSA a few days after the Moody's

7 meeting. There are a lot of redactions on this page. There

8 is the same problem we have been citing.9 THE COURT: I think we will get to that later this10 afternoon.11 MR.HOLGADO: It's in the next paragraph I cited12 from, but to make clear, from the record he was reading on a

13 paragraph, I wasn't citing from, but he made his point.

14 Your Honor, the point here is that Mr. Buchmiller

15 and he says it in is affidavit as well, what he has said, he

16 was already well aware of the fact that there were differing

17 views as to how to predict future losses on MBIA's18 exposures.19 This, in no way, lead him to change his conclusion

20 about the analytical soundness of MBIA's loss modeling

21 approach. Indeed, your Honor, Mr. Buchmiller and the rest

22 of the Department already new about substantially more

23 pessimistic views on MBIA's financial condition, including

24 those of Bill Ackman, that noted short seller I mentioned

25 earlier, your Honor.26 He had been claiming for years self-servingly

Page 8

1 PROCEEDINGS - HOLGADO2 because of his short position at MBIA in the stock, th3 MBIA was insolvent. Even without the transformation he h

4 been saying that. So, they were aware of that divergenc

5 in views, your Honor.6 Thus, the Lehman analysis, had it been shown to M

7 Buchmiller at the time, would have been nearly yet anothe

8 data point on a continuum of opinion that Mr. Buchmille9 already knew existed.10 In short, your Honor, stripping away, as this Cour

11 has already indicated it should, any consideration o12 whether MBIA somehow wrongfully concealed this analysis from

13 the Department, the only question this Court must ask itse

14 with respect to it is, whether this one particular analysi

15 by one particular investment bank regarding some of th

16 structured finance products insured by MBIA, whether thi

17 one data point, along with the vast continuum of opinio

18 was something that was so materially significant, that M

19 Buchmiller and the Department could not have rational

20 accepted MBIA's own loss modeling methodologies a

21 reasonable, without reviewing them. That's what your Hon

22 would have to conclude.23 Now, the banks themselves conducted their ow

24 internal analyses of these underlying structured finan

25 products. They had these exposures in the first instan

26 and policies with MBIA. So, they were modeling thes

Page 8

1 PROCEEDINGS - HOLGADO2 exposures themself.3 Now they, in the past, claimed this was high

4 proprietary information and yes, they had produced the5 documents in the plenary action to MBIA and your Honor,

6 response to my point at the April 20th hearing that they ha

7 never produced them to the State, they did produce them t

8 the State as well, and there is some question as to wheth

9 it's a complete production on what MBIA was seeking in th

10 plenary, but your Honor, the point is not that.11 The point is that they were not something tha12 could have been shared or available to Mr. Buchmiller at t

13 time of the transformation review.14 Their having produced it in this litigation doesn15 change anything. The fact is, they were not available

16 the time to Mr. Buchmiller and indeed, Mr. Giuffra, durin

17 his oral presentation to your Honor, referenced the fa18 that Mr. Buchmiller did not have access to the loss mode

19 of large financial institutions during his transformatio

20 review.21 Now, the banks' argument that the analysis b22 another particular financial institution, Lehman, was 23 necessary for Mr. Buchmiller's review, while their ow

24 analysis were indisputable unavailable to him, that argume

25 collapses of its own weight.26 Moreover, the Lehman analysis, such like th



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v.May 22, 2

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1 PROCEEDINGS - HOLGADO2 analysis prepared by the banks' expert, Black Rock, that3 analysis was based on a proprietary or, quote unquote, black

4 box methodology, one that Lehman would not even disclose to

5 MBIA who had hired it, and would not certainly, had not,

6 would not have disclosed to the Department either.7 So, because of this your Honor, the utility of that

8 analysis to Mr. Buchmiller's review had it even been shown9 to him, the utility of it would be limited, your Honor,10 because Mr. Buchmiller's review was focused specifically on

11 the analytical soundness of MBIA's methodologies.12 And so, sharing Lehman's results would not give Mr.

13 Buchmiller any additional context for evaluating the14 methodologies that MBIA used, because Lehman would not

15 disclose its methodologies to anyone.16 So, your Honor, actually, Mr. Buchmiller testified

17 to this fact. Here says at his deposition on September 28,

18 2010.19 "Question: Did you do any systematic comparison

20 of the methodologies used by MBIA and the methodology used

21 by any financial institution to model losses for asset22 backed securities?23 Mr. Buchmiller says: "Given the limitations on

24 what people at financial institutions would give to us or

25 present to us, because it's all proprietary, your Honor, I

26 would not have had the same level of information to make

Page 850

1 PROCEEDINGS - HOLGADO2 what I would, what I thin

Documents

Banksvmbia 5.22 Transcript