MBIA (MBI) Being Sued as Group of 19 Banks Claim Business Split Was 'Fraudulent'

May 14, 2009 10:49 AM EDT

Shares of MBIA (NYSE: MBI) are tumbling today amid reports that a group of 18 banks have filed a lawsuit against the insurer, claiming that MBIA's decision to split up its businesses was "fraudulent" and eventually left one of its units effectively insolvent.

The stock most recently traded at $5.44, down about 4.4% from yesterday's closing price.

Included in the group of financial institutions were U.S.-based banks such as JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) and also foreign banks such as Barclays (NYSE: BCS) and UBS (NYSE: UBS).

Earlier this year, in February, MBIA separated its profitable U.S. muni-bond insurance portfolio from the troubled mortgage assets being held on the same balance sheet. MBIA execs indicated that the move was an attempt to restart writing guarantees on municipal bonds.

Now the group of angry banks are alleging that this split and the transfer of $5 billion in cash and assets from MBIA's main insurance division was fraudulent and "an unlawful attempt to escape" contractual agreements with required MBIA to cover losses from toxic mortgage securities.

In light of the allegations, MBIA regulators have said that, based on internal estimates of future losses, the main insurance branch still remains solvent. On the other side of the argument, the group of banks believes MBIA is "undercapitalized and has no prospect of writing new insurance".

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• UBS
• JPMorgan
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