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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 -
13ERIC DINALLO, in his capacity as Superintendent
14 of the New York State Insurance Department; theNEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.;
15 MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC
FINANCE GUARANTEE CORPORATION (f/k/a MBIA16 INSURANCE CORP. OF ILLINOIS),
17RESPONDENTS.
18 - - - - - - - - - - - - - - - - - - - - - XINDEX NO: 601846/09 60 Centre Street
19 New York, New YorkJune 5, 2012
20BEFORE: HONORABLE BARBARA R. KAPNICK, Justice
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22 APPEARANCES:
23 SULLIVAN & CROMWELL, LLPAttorneys for Petitioners
24 125 Broad StreetNew York, New York
25 BY: ROBERT J. GIUFFRA, JR., ESQ.MICHAEL H. STEINBERG, ESQ.
26 WILLIAM WAGENER, ESQ.
NINA KOSS - OFFICIAL COURT REPORTER
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1 PROCEEDINGS2 KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP
Attorneys for Respondents3 1633 Broadway
New York, New York4 BY: MARC E. KASOWITZ, ESQ.
DANIEL BENSON, 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
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15 NINA J. KOSS, C.S.R., C.M.
BARBARA STROH, C.M.R., C.R.R.16 Official Court Reporters
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1 PROCEEDINGS - KASOWITZ2 T1 THE COURT: Good morning.3 So, Mr. Kasowitz, ready to continue?4 MR. KASOWITZ: I am, your Honor, thanks.5 Good morning.6 THE COURT: Good morning.7 MR. KASOWITZ: Your Honor, I want to turn now to an8 argument we heard from the banks last week to the effect9 that Section 1309 of Insurance Law requires that this Court
10 find contrary to the findings of Superintendent Dinallo and
11 to the findings of Mr. Buchmiller and contrary to the
12 findings of The Department of insurance, that MBIA was, in
13 fact, insolvent as a result of the approval of the
14 transformation in February 2009.
15 The banks made that argument last week at 14 --
16 pages 1429 through 1435 of the transcript, among other
17 places.
18 So, the banks argue that under Section 1309, it
19 doesn't matter whether the Superintendent specifically found
20 that MBIA had more than sufficient assets to pay claims from
21 policyholders as they came due and therefore, that MBIA was
22 solvent.
23 The banks' claim that the ability to pay claims as
24 they come due, which is the sine qua non of any solvency
25 analysis, is actually irrelevant under Section 1309 and that
26 all that matters here is MBIA, in February 2009, was able to
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1 PROCEEDINGS - KASOWITZ2 reinsure all of its coverage with a third-party, regardless3 of how ample MBIA's reserves were and were found to be by4 the Superintendent at that time.5 The banks argue, your Honor, that Section 1309(a)6 required that The Department find that MBIA was insolvent7 and indeed, that MBIA, that The Department was required to8 complete a full fledged examination exam, statutory9 examination of MBIA prior to approving transformation.
10 But, your Honor, when you actually read Section
11 1309, rather than listening to this incorrect
12 interpretation, it's clear that the statute doesn't suggest
13 in any way, that the Department was required to make a
14 finding of insolvency when MBIA, in fact, wasn't, nor does
15 it require that the Department was required to complete a
16 full statutory examination prior to approving MBIA's
17 application.
18 To the contrary, the statute confirms that the
19 Superintendent did exactly what he was empowered to do under
20 the Insurance Law.
21 Now, Section 1309 is entitled, "Solvency of an
22 Insurer" and it describes the conditions under which the
23 Superintendent is empowered to make a finding that a New
24 York insurer is insolvent, and when the Superintendent may,
25 in his discretion, place into rehabilitation an insurer that
26 he determines is insolvent.
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1 PROCEEDINGS - KASOWITZ2 Let's take a look at the words of the statute.3 Slide 31.4 (Pause in the proceedings.)5 MR. KASOWITZ: Now, fifteen seconds.6 THE COURT: What's a little 15 seconds.7 MR. KASOWITZ: Between friends.8 All right. Let's read it.9 1309: Insolvency of an Insurer, A, whenever the
10 Superintendent finds, from a financial statement or report
11 on examination, that an authorized insurer is unable to pay
12 its outstanding, lawful obligations as they mature, in the
13 regular course of business, as shown by an excess of
14 required reserves and other liabilities over admitted assets
15 or by its not having sufficient assets to reinsure all
16 outstanding risks with other solvent, authorized assuming
17 insurers after making all the claims owed, such insurer
18 shall be deemed insolvent and the Superintendent may proceed
19 against it, pursuant to the provisions of Article 74 of this
20 chapter.
21 So, let's take a minute to walk through this
22 provision.
23 It applies, quote, whenever the Superintendent
24 finds that an authorized insurer is unable to pay its
25 outstanding, lawful obligations as they mature in the
26 regular course of business."
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1 PROCEEDINGS - KASOWITZ2 As I mentioned, your Honor, that is a classic3 definition of insolvency for an insurer. Can it pay its4 claims as they come due?5 Section 1309 applies when the Superintendent makes6 a finding that an insurer cannot pay its claims as they come7 due, and makes that finding based upon either a financial8 statement or from, or based on an examination, a report on9 examination. That is a report after the triennial
10 examination provided for under Section 309 of the Insurance
11 Law.
12 Now, of course here, your Honor, as we have seen,
13 the Superintendent never made a finding that MBIA was unable
14 to pay its outstanding, lawful obligations as they mature in
15 the regular course of business.
16 Instead, The Department made precisely the opposite
17 finding here, and the evidence in the record, including the
18 deposition testimony, sworn affidavits, contemporaneous
19 documents, demonstrates conclusively that, based on its
20 review, including its review of MBIA's financial statements,
21 The Department found that MBIA Insurance would be solvent
22 after the transformation, including under the definition,
23 this definition of insolvency found in Section 1309.
24 Now, The Department says that --
25 MR. STEINBERG: Your Honor, we would like to have
26 the cite he is now going to give as to where The Department
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1 PROCEEDINGS - KASOWITZ2 made this finding under 1309.3 MR. KASOWITZ: You know what? Counsel will have4 their chance to make their arguments tomorrow or later5 today.6 So, let me just let me just proceed with my7 argument here.8 The Department says it in their approval letter at9 page 6: The Department finds, slide 32, The Department
10 finds that MBIA Corp will retain sufficient surplus to
11 support its obligations and writings following the payment
12 of the MBIA Corp dividend.
13 The Department also says it in the press release
14 announcing its approval of the transformation at page two.
15 Slide 33.
16 "Both MBIA Corp and National will continue to pay
17 all valid claims in a timely fashion, and both entities will
18 have sufficient resources to meet policyholder claims as
19 they come due."
20 Consistent with New York State Insurance Law, the
21 New York State Insurance Department only approved the
22 transaction after deciding that both companies would have
23 sufficient statutory capital to meet the letter and spirit
24 of the Insurance Law.
25 Now, the finding that MBIA would be able to pay all
26 of its claims as they came due, is also confirmed by other
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1 PROCEEDINGS - KASOWITZ2 evidence in the record.3 That includes, among other things, your Honor, Mr.4 Buchmiller's November 24th, 2009 affidavit at paragraph 57,5 Mr. Buchmiller's September 28th, 2010 deposition at page6 423, lines 7 through 24, Mr. Moriarity's November 24th,7 2009, affidavit at paragraph 69, and Mr. Moriarity's8 September 2nd, 2010 deposition at 334, lines 5 through 18,9 among other places.
10 Going back to the text of Section 1309, your Honor,
11 by its own terms, the statute applies when the
12 Superintendent makes a finding that an insolvent insurer
13 cannot pay its claim as they come due based on financial
14 statements or a report on examination.
15 And, there was no such finding here. But then,
16 the statute then goes on to say that, if and when the
17 Superintendent does make such a finding, such a finding may
18 be shown by, shown by either of two methods.
19 First, a Superintendent's finding can be supported
20 by financial statements or an examination before it
21 reflecting, quote, an excess of required reserves and other
22 liabilities over admitted assets, close quote.
23 That's to say, your Honor, a balance sheet that
24 suggests that the company may be under reserved.
25 Second, a Superintendent's finding would be based
26 on a determination that the insurer does, quote, not have
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1 PROCEEDINGS - KASOWITZ2 sufficient assets to reinsure all outstanding risks with3 other solvent, authorized assuming insurers after paying all4 accrued claims owed."5 In other words, your Honor, that its risks are so6 great, that it cannot afford to pay another insurer to take7 them on.8 The statute goes on to say that, if and when the9 Superintendent makes a finding that an insurance company is
10 unable to pay its claims as they come due, based on either
11 the financial reports, financial statements or report on
12 examination, and can support that finding by showing either
13 that the company is under reserved or unable to afford
14 reinsurance for its risks, then that insurer, quote, shall
15 be deemed insolvent, and the Superintendent may proceed
16 against it under the rehabilitation provisions of the
17 Insurance Law.
18 That's what the statute says, your Honor. It
19 defines the Superintendent's power to find that an insurer
20 is insolvent before proceeding with rehabilitation at the
21 Superintendent's discretion.
22 So, what does this have to do with this proceeding?
23 Frankly, very little.
24 Now, the banks' hook for Section 1309 and Mr.
25 Holgado talked about this yesterday, is not anything in the
26 banks' petition in this case.
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1 PROCEEDINGS - KASOWITZ2 Rather, there is no mention of Section 1309 in the3 banks' petition in this case.4 Rather, in paragraph 87 of the banks' verified5 petition, which was filed three years ago, June 2009, that6 alleges, on information and belief, MBIA Insurance's7 liabilities to its policyholders substantially exceed its8 claim paying resources.9 In addition, the fraudulent restructuring has, on
10 information and belief, left MBIA Insurance insolvent in
11 that the present fair salable value of its assets is less
12 than the amount that will be required to pay its probable
13 liabilities on its existing debts as those debts become
14 absolute and mature.
15 "Even if MBIA Insurance is not currently insolvent,
16 the fraudulent restructuring has left it so under
17 capitalized that it faces an unreasonably high risk of
18 insolvency."
19 Then, in responding to these allegations, The
20 Department stated in its answer, which was filed in November
21 of 2009 as follows -- Mr. Holgado referred to this
22 yesterday.
23 "Deny the allegations contained in paragraph 87 of
24 the petition affirmatively there, that the definition of
25 insolvency stated by Petitioners in such paragraph is
26 irrelevant in this proceeding, because the Department's
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1 PROCEEDINGS - KASOWITZ2 determination of MBIA Corp's post transformation solvency3 was based on the definition of insolvency provided for in4 Insurance Law Section 1309, which The Department was5 required to utilize in making its determination.6 So, your Honor, as you can see, what happened here7 was that the banks generated their own definitions of8 insolvency -- all of which were borrowed, by the way, from9 the debtor creditor law, which has nothing strictly to do
10 with this proceeding, but with the plenary case, in drafting
11 the petition.
12 They claim, without any authority to back them up,
13 that MBIA failed their definition of solvency, but even if
14 MBIA didn't fail their definitions of insolvency in the last
15 sentence there, the last allegation, The Department should
16 have disapproved the transformation anyway.
17 The Department denies the accuracy of the banks'
18 definition of insolvency, and then recognizing the
19 inaccuracy in the banks' petition, The Department correctly
20 cites Section 1309 in response to these unsupported and
21 inaccurate statements of the definition of insolvency under
22 the New York Insurance Law.
23 So, having three years later decided that Section
24 1309 is the key to their petition, what is it, how is it
25 that the banks read Section 1309?
26 They say that the statute should not be read as
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1 PROCEEDINGS - KASOWITZ2 it's written, but instead, that it should be read to support3 this new argument that, the only thing that matters in4 Section 1309 is the reinsurance test.5 Here is what they say. They say that 13096 actually means that the Superintendent must, before7 approving a transaction like transformation, conduct and8 complete a statutory examination under Insurance Law Section9 309.
10 1309 doesn't say that. It says, a determination
11 of insolvency can be made based on either an insurer's
12 financial statement or on a report of examination.
13 Second, they say that Section 1309 requires,
14 requires that the Superintendent make two determinations
15 concerning an insurer's finances.
16 They say that the Superintendent is required to
17 determine whether the insurer has, quote, an excess of
18 required reserves and other liabilities over admitted assets
19 and then, the Superintendent is also required to make a
20 separate finding concerning whether the insurer has, quote,
21 sufficient assets to reinsure all outstanding risks with
22 other solvent authorized assuming insurers after paying all
23 accrued claims owed.
24 The banks' reading goes on to require that if
25 either of these prongs is met, then the insurer is
26 automatically deemed insolvent and the Superintendent has no
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1 PROCEEDINGS - KASOWITZ2 discretion in the matter.3 But, your Honor, we can see from the plain text of4 the statute, the portion of Section 1309 that explains how a5 finding of insolvency may be shown by the Superintendent is6 relevant and potentially applicable only when and if the7 Superintendent invokes it as support for a finding, a8 showing, that the insurer is unable to pay its claims as9 they come due.
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1 MBIA Respondents-Kasowitz2 T23 MR. KASOWITZ: There has never been, your4 Honor, never been such a finding here.5 To the contrary, the superintendent has6 concluded here just the opposite. The banks'7 suggestion that the manner in which such a finding may8 be made controls and supersedes the superintendent's9 power to make the predicate finding of an insurer's
10 solvency or insolvency is simply unsupported by
11 anything in the statute.
12 The purpose of the as-shown-by clause, the
13 acid test and the reinsurance test, is to compel the
14 superintendent, to be able to justify a finding of
15 insolvency, when and if he or she makes one, and to
16 provide an insurer with a clear basis to challenge the
17 superintendent's findings if it seeks to do so.
18 There is nothing whatsoever in section 1309
19 that compels the superintendent to make a finding of
20 insolvency or to address the as-shown-by clauses in the
21 absence of a predicate finding of insolvency.
22 And while the banks try to rely on the opinion
23 of their solvency expert, Mr. Stulz, to buttress up
24 this argument, Mr. Stulz, their solvency expert,
25 properly made very, very clear that he's offering no
26 opinion on the manner in which section 1309 is applied:
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1 MBIA Respondents-Kasowitz2 "I have no legal expertise and do not know the3 proper legal interpretation of this paragraph." That's4 at his affidavit at paragraph 180.5 So, your Honor, the clear, unambiguous reading6 of section 1309 as we described makes complete sense,7 and the banks' reading impermissibly would read the8 phrase, quote, "the superintendent finds from a9 financial statement or report on examination," close
10 quote out of the statute.
11 Moreover, if the banks' view were correct,
12 then the solvency of every insurer in New York State
13 would be solely dependent on the ready availability of
14 a robust and fully liquid reinsurance market with the
15 actual ability of the insurer in question to pay the
16 claims being totally irrelevant.
17 So let's take a couple of hypotheticals to see
18 how this works. Let's say that the superintendent were
19 applying the banks' interpretation of section 1309 to
20 the largest insurer in a particular area, and that
21 insurer has tremendous reserves and has an ample
22 cushion of assets well beyond what would be required to
23 meet its obligations as they come due.
24 The insurer is certainly not insolvent by any
25 financial measure, but because of the size of the
26 insurer's book of business and its specialized nature,
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1 MBIA Respondents-Kasowitz2 there is no practical availability of reinsurers.3 No reinsurer is in a position to take on this4 risk because this insurance company is so well off.5 According to the banks, section 1309 says that6 an insurer is insolvent, notwithstanding that it has7 enormous reserves and notwithstanding that it has no8 risk of failing to pay its claims as they come due.9 An even simpler hypothetical, your Honor,
10 let's say there is only one insurer left in New York.
11 It has a monoply, and it has enormous assets. Its
12 risks can't be insured because there are no other
13 insurers out there.
14 Again, the banks say that section 1309 means
15 that that enormously successful monoply operator is
16 insolvent despite the actual facts concerning its
17 financial condition.
18 That is not what the law says, nor would it
19 make any sense to read it that way.
20 Now, what's amazing here, your Honor, is that
21 one of the pieces of evidence that the banks point to
22 in purported support of their contention that MBIA
23 would have failed the so-called reinsurance test makes
24 exactly this point, exactly the point I've made.
25 In July of 2008, as we have seen, the
26 transformation was already under consideration. Mr.
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1 MBIA Respondents-Kasowitz2 Buchmiller and others from the department were on site3 at MBIA doing risk surveillance.4 Chuck Chaplin, MBIA's CFO, sent Jay Brown, the5 company --6 MR. GIUFFRA: Your Honor, may I ask -- the7 problem is could you please, Mark, tell us where that8 is in the record?9 MR. KASOWITZ: Yes, I will.
10 Mr. Chuck Chaplin, MBIA's CFO, sent Jay Brown,
11 the company CFO, an e-mail that says -- can you pick up
12 the slide. This is July 27, 2008.
13 "In today's reinsurance market, we don't
14 believe that there is capacity to reinsure our entire
15 book at virtually any price, so any analysis of a
16 required price is highly speculative."
17 Thanks, Bucky.
18 So what Mr. Chaplin was referring to when he
19 said "in today's reinsurance market," was the enormous
20 dislocation of the market caused by this enormous
21 recession as with other markets, including the public
22 finance markets. As we know, it was difficult, if not
23 impossible, to obtain reinsurance at any price.
24 That's what MBIA's executive team recognized
25 there in July 2008. That's exactly the hypothetical
26 that I raised.
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1 MBIA Respondents-Kasowitz2 The so-called reinsurance test doesn't work in3 this particular situation not because of anything about4 MBIA's actual ability to pay its claims as they come5 due but as a result of broader conditions in the market6 for reinsurance.7 There was no capacity for the book to be8 reinsured, so that piece of the section 1309 test9 couldn't be applied by a superintendent who was
10 determining whether or not a particular insurer was
11 insolvent, which, of course, was not the case here.
12 And, of course, contrary to the banks'
13 positions, the inapplicability of the reinsurance test,
14 due to circumstances other than the insufficiency of
15 the insurer's claims-paying ability, is irrelevant to
16 anything that the superintendent was doing in his
17 review of the proposed transformation.
18 Your Honor, perhaps that's the reason, as Mr.
19 Holgado pointed out yesterday, that Mr. Moriarty, whose
20 testimony the banks are happy to rely on when they
21 think it suits their purposes but unhappy to rely on it
22 when it doesn't, stated that he'd never seen this
23 particular prong used in his 31 years, because it
24 simply hadn't been applied by any superintendent in
25 those circumstances.
26 So, I think, your Honor, that this Executive
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1 MBIA Respondents-Kasowitz2 Life situation then becomes an effort by the banks to3 grasp at straws.4 Mr. Holgado pointed out -- and I thought he5 did it very well; I'll just deal with it a second --6 that Executive Life was a life insurance company, an7 on-line insurer.8 Your Honor, Executive Life had been placed9 into rehabilitation by the Liquidation Bureau, I think,
10 back in 1991, and the Liquidation Bureau recently
11 sought to convert that rehabilitation plan into a
12 liquidation.
13 So, this is exactly the way that the section
14 is supposed to work. In connection with those filings
15 in which a determination had been made that this
16 particular company couldn't pay its claims as they came
17 due, couldn't meet its obligations, certain objecters
18 arose to challenge that.
19 In response to those objections, the
20 Liquidation Bureau, in the filings shown to the court
21 by the banks, said that the objecters were wrong and
22 that the superintendent's finding of insolvency was
23 completely supported by the banks' financial statements
24 which shows that Executive Life had, I think, $2.5
25 billion in liabilities, which far exceeded the $900
26 million in assets.
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1 MBIA Respondents-Kasowitz2 The Liquidation Bureau also noted that, you3 know, after this finding had been made by the4 Liquidation Bureau, they also noted that the so-called5 reinsurance test would be failed.6 No big deal. A finding had already been made,7 according to the first predicate, the first, the main8 predicate of the statute that this insurer could not9 meet its obligations as they came due.
10 Pretty unremarkable, your Honor. And the
11 Liquidation Bureau did exactly what the Insurance Law
12 requires.
13 So, it explained that its finding of
14 insolvency was, quote, "shown by," close quote, exactly
15 the prongs in the statute that it's supposed to use.
16 So, that was both those prongs. So what we
17 see here, your Honor, is that the banks, having failed
18 to show that the department acted in any way
19 irrationally in its review and approval of
20 transformation, they're now arguing that the whole
21 thing was illegal because the department didn't follow
22 the requirements of a statute that the banks never
23 cited in their petition, 1309, never cited in their
24 petition, a statute that is never applied in the way
25 that the banks are seeking to apply it because it
26 simply does not mean what they say it means.
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1 MBIA Respondents-Kasowitz2 Now, others have tried this from time to time.3 Never in the same context but in 2008 Mr. Ackman, who4 was a short seller whose name I think was raised by the5 banks during their argument, and whose play book, in6 attacking MBIA, the banks seem to have adopted, he7 argued in a letter that he sent to the MBIA board that8 the company was insolvent under section 1309 because it9 purportedly couldn't reinsure its book of business.
10 That was months before the application for the
11 transformation was made to the department.
12 A letter was sent -- in fact, we prepared
13 it -- on behalf of MBIA to Superintendent Dinallo on
14 July 9, 2008, pointing out that Mr. Ackman's section
15 1309 claim, which he had been using to try to drive the
16 price of MBIA stock down, that this argument was
17 irrational, it didn't make any sense.
18 You know what, your Honor? The department
19 didn't accept Mr. Ackman's argument about 1309, this
20 contorted definition of it. It didn't accept it then;
21 it's not accepting it now because it's not the way that
22 the statute reads and should read.
23 So, your Honor, the meaning of 1309 is clear.
24 It couldn't mean what the banks say it means, and it
25 doesn't mean what the banks say it means, but, in any
26 event, your Honor, the superintendent has interpreted
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1 MBIA Respondents-Kasowitz2 it correctly.3 Like every agency in the State of New York,4 the Insurance Department's interpretation and5 application of the Insurance Law, including section6 1309, is entitled to substantial deference.7 Let's take a look, Bucky.8 So these are three Court of Appeals decisions9 that talk about the substantial deference to which the
10 superintendent of insurance's decision-making is and
11 interpretations are given, as well as other agencies.
12 In the Medical Society versus Serio case, a
13 2003 case, and that concerned a former superintendent
14 who is one of the experts in this case, the Court of
15 Appeals said that the superintendent, quote, "has broad
16 power to interpret, clarify, and implement the
17 legislative policy.
18 "The superintendent's interpretation, if not
19 irrational or unreasonable, will be upheld in deference
20 to his special competence and expertise with respect to
21 the insurance industry, unless it runs counter to the
22 clear wording of a statutory provision."
23 In the Appelbaum case, a 1985 Court of Appeals
24 case, it says that: "Where an agency is, 'responsible
25 for administering and enforcing a statute,' its
26 interpretation must be given, 'great weight and
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1 MBIA Respondents-Kasowitz2 judicial deference,' so long as the interpretation is3 neither irrational, unreasonable, nor inconsistent with4 the governing statute."5 The Chesterfield Associates case, 2005 Court6 of Appeals case, is to the same effect.7 In fact, here, your Honor -- that's fine,8 Bucky -- Superintendent Dinallo was called on to do9 more than just interpret a complex statute of the
10 Insurance Law, an area of his special competence and
11 expertise, which alone would have required -- requires
12 the courts to give him great deference.
13 He also had to apply that statute to the facts
14 of the case before him as developed by the department's
15 review of the transformation application, which, as we
16 have noted, was being conducted concurrently with an
17 examination.
18 The law is clear in New York that where that's
19 the case, where there is an interpretation being given
20 to a set of facts, that interpretation can't be
21 disturbed unless it's found to be irrational.
22 As the first deposition has held, quote:
23 "Where the judgment of an agency involves factual
24 evaluations in the area of that agency's expertise and
25 is supported by the record, a reviewing court may not
26 re-evaluate the weight accorded the evidence adduced,
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1 MBIA Respondents-Kasowitz2 since the duty of weighing the evidence, interpreting3 relevant statutes and making the determination rests4 solely in the expertise of the agency."5 In fact, your Honor, not only is this the law6 in this state, but it is the great deference that7 should be accorded by the judiciary to the8 superintendent of insurance, as confirmed by the former9 superintendents who have been selected as experts by
10 the banks in this matter.
11 We'll take a quick look at this. 39, Bucky.
12 This is former Superintendent Serio:
13 "Question: And you would also agree with me,
14 Mr. Serio, that the superintendent of insurance in New
15 York is vested with broad powers to interpret, clarify
16 and implement the state's legislative policy as
17 reflected in the Insurance Law?"
18 There's an objection.
19 "Answer: Yes, I would agree with that."
20 Former Superintendent Muhl:
21 "Question: Mr. Muhl, you would agree with me
22 that in New York the Insurance Law -- would you agree
23 with me that the Insurance Law grants the
24 superintendent of insurance broad powers and authority
25 to effectuate and implement its provisions?"
26 There is an objection.
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1 MBIA Respondents-Kasowitz2 "Answer: I believe that there is broad3 authorities that the superintendent has in implementing4 or enforcing the laws, rules and regulations, as long5 as -- it's not unbridled authorities, but he has to do6 it within the bounds and limits of laws, rules and7 regulations."8 41. This is former Superintendent Stewart:9 "Question: Would you agree with me that in
10 New York the Insurance Law grants the superintendent of
11 insurance broad powers to effectuate and enforce
12 provisions of the Insurance Law?"
13 There's an objection.
14 "Answer: Yes, with -- obviously, enforce
15 provisions of the Insurance Law, not to make up as he
16 goes along.
17 "Question: You had these powers at the
18 time -- I'm sorry."
19 "Mr. Greenblatt: We wouldn't want that.
20 "Question: You had those powers at the time
21 you were superintendent of insurance, correct?
22 "Answer: I did.
23 "Question: And Mr. Corcoran did?
24 "Answer: Yeah.
25 "Question: And Mr. Muhl did?
26 "Answer: Yes.
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1 MBIA Respondents-Kasowitz2 "Question: Mr. Serio did.3 "Answer: Okay.4 "Question: And Mr. Dinallo did?5 "Answer: Yes.6 "Question: Superintendent Dinallo had those7 broad powers to effectuate, enforce provisions of the8 Insurance Law at the time he was superintendent?9 "Objection.
10 "Answer: Yes."
11 Finally, your Honor, while it's abundantly
12 clear what this statute says and means, and while it's
13 abundantly clear that the superintendent, within the
14 exercise of his authority and discretion, which the
15 banks concede and their experts concede interpreted it
16 correctly, it's also clear that in the event -- in
17 certain circumstances the Court of Appeals has
18 recognized that where an administrative agency
19 determines that, in light of the circumstances it faces
20 that it's compelled to apply a flexible interpretation
21 of a particular statute, the courts will not disturb
22 the agency's decision.
23 And that, your Honor, is the Tenants Union
24 case, 40 N.Y. 2d 133, 1976.
25 There the court found that: "So long as the
26 agency's application of the statute dictates, even if
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1 MBIA Respondents-Kasowitz2 not fully compliant, was designed to produce an3 accurate result, it would be upheld."4 (Continued on next page)5 (End of take 2)6789
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1 PROCEEDINGS - KASOWITZ2 T3 MR. KASOWITZ: Here of course, your Honor, The3 Department fully and accurately applied Section 1309.4 But, even if the banks were correct that The5 Department did not, and they are not at all correct, your6 Honor, the principles of the tenant's union decision would,7 in any event, dictate that the Department's good faith8 interpretation of Section 1309 was intended to and did9 produce the result that comports with the intended statute
10 and therefore, should not be disturbed by this Court.
11 So, your Honor, I want to turn to, I want to turn
12 to another argument that the banks have made here.
13 You know, your Honor, we made the point at the
14 beginning of our argument that, and I guess the nice way to
15 put it is, that it ill behooves the Bank of America, which
16 was the beneficiary of billions of dollars in TARP money,
17 based on a weekend of meeting with Federal regulators in
18 2008, to ask this Court to overturn a decision of the
19 Superintendent of Insurance in New York in 2009, that was
20 based on a year long review and analysis of the relevant
21 facts, and which included months of on site review by the
22 Department's principal, sort of lead investigator on this.
23 Last week, I heard the banks' lawyer say something
24 that, to the effect of, that they wanted to like sort of
25 look at the quote, true TARP timeline." I think that the
26 banks and they made some arguments about TARP and about the
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1 PROCEEDINGS - KASOWITZ2 banks that, I think, really misses the point here.3 First, no matter what they say, it is absolutely4 uncontradicted that following a series of meetings in5 September, I think it was September 17th and 18th, as the6 banks' counsel correctly pointed out, that Secretary7 Treasurer Paulson concluded that the Federal government8 should spend up to $700 billion to purchase troubled assets9 from a host of banks, and that those banks included the Bank
10 of America and Merrill Lynch, which received, I think, the
11 number that the banks said was $45 billion.
12 Now, the banks counsel said that the money that the
13 banks received was, I think the quote was, the Federal
14 government's money but, I don't think that's really
15 accurate, your Honor. I think that $45 billion really was
16 the taxpayers' money, our money, but no, no need to get into
17 a wrangle with the banks about whether its the Federal
18 government's money or our money. The fact is, that it was a
19 few days of meetings.
20 Second, the banks argue that, and they try to make
21 something out of the fact that after Treasury's decision
22 based on the few days of meetings, Congress wrote some
23 legislation to authorize this action.
24 I think the facts with respect to that were that
25 between September 20th when TARP was announced, and
26 October 3rd, when the Treasury's three page TARP proposal
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1 PROCEEDINGS - KASOWITZ2 was morphed into the Economic Stabilization Act and signed3 into law, during those two weeks, it's absolutely clear that4 no Treasury official was doing anything close to what the5 work that Jack Buchmiller was doing at MBIA, over months and6 months and months, and the work that The Department was7 doing too.8 So, whether or not there was legislation, whether9 or not it was $45 billion, the fact is, it was a lot of
10 money decided upon, in a very short period of time, to make
11 a decision with respect to this enormous financial crisis
12 and the work that was done there pales in comparison to the
13 work that the New York Insurance Department did over months
14 and months to make the rational decision that it made in
15 approving transformation.
16 But, I am glad that the banks' counsel raised this
17 point about Congress' involvement with TARP because, and I
18 think this really sort of underscores the futility of the
19 banks' whole case, your Honor, because the fact is that
20 while Congress needed to step in at this last minute and
21 pass this emergency legislation with respect to TARP, the
22 New York State legislature had already invested the
23 Superintendent of Insurance in New York with the power and
24 the authority to do exactly what he did here.
25 There was no need for some special, last minute
26 legislation. There is no dispute that he acted within the
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1 PROCEEDINGS - KASOWITZ2 scope of the authority and discretion that he had been3 granted. We just saw the testimony that the banks' own4 experts gave with respect to this.5 So, the banks can disagree about whether the6 Superintendent's determination was prudent, whether it was7 fair, whether it was reasonable. They can disagree about8 all of that, but their disagreement does not rise to the9 level of meeting the heavy burden that they have in an
10 Article 78 proceeding, to have that determination
11 overturned.
12 Now, I think the banks also made the point in
13 talking about this legislation and TARP, that it applied to
14 B of A, but not to Soc Gen. So, I am happy to discuss a
15 situation that did apply to Soc Gen, where again, during
16 this financial crisis, the decision, decisions were made in
17 a much compressed period of time to give billions and
18 billions of dollars to these banks in circumstances that
19 were just dramatically less considered, thoughtful,
20 conscientious and expensive than the work that The
21 Department did here, work done by Mr. Buchmiller, work done
22 by others and decision made by Superintendent Dinallo.
23 That, the bailout that I am talking about now, your
24 Honor, is the bailout of AIG in September 2008. There, Soc
25 Gen received more than $11 billion in United States taxpayer
26 funds. Bank of America received more than -- $4.5 billion
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1 PROCEEDINGS - KASOWITZ2 in taxpayer funds and Merrill Lynch got nearly $2 billion,3 and the timeline for the AIG bailout is even, provides an4 even starker contrast with the Department's review of5 transformation than Treasury's decision to deploy TARP funds6 to the banks.7 On September 12th, 2008, AIG informed The8 Department, the Treasury, and the Federal Reserve Bank of9 New York, that it was facing liquidity problem and they
10 would run out of liquidity within 5 to 10 days, largely as a
11 result of credit default swaps that AIG had entered into
12 with people like B of A, Merrill Lynch and Soc Gen.
13 On September 16th, 2008, The Federal Reserve put
14 together a term sheet for an $85 billion credit facility
15 between AIG and The Federal Reserve. Six days later, on
16 September 2nd, the final credit agreement was executed.
17 THE COURT: It has to be October.
18 MR. KASOWITZ: Sorry.
19 Six days later on September 22nd, sorry, the final
20 credit was executed by The Federal Reserve and AIG.
21 As I count it, your Honor, that's ten days and with
22 these other Federal bailouts during this financial crisis,
23 there is, it's absolutely clear that Federal regulators
24 didn't perform anything that could conceivably resemble the
25 work that The Department and Jack Buchmiller did over the
26 course of months and months to evaluate and approve the
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1 PROCEEDINGS - KASOWITZ2 transformation.3 MR. GIUFFRA: Your Honor, your Honor, can I make a4 request?5 Is this in the record of this case? Is this6 something that was before Mr. Dinallo?7 THE COURT: Obviously not, counsel.8 MR. GIUFFRA: Okay.9 THE COURT: I will allow it for argument. Okay.
10 MR. KASOWITZ: I think it's very fair, I think it's
11 pretty fair. I think, your Honor, not only is it fair
12 argument to compare, for the purpose of ascertaining
13 rationality, reasonableness, equitableness, fairness and the
14 like, the decisions, the decisions of, the work that was
15 done by these Federal regulators, compared to the work done
16 by the Superintendent, not only is it fair argument, it
17 certainly is something that can be taken judicial notice of,
18 as your Honor did, and there are references in the record to
19 it.
20 If you look at the affidavit of Jeffrey Miller, who
21 is our, who is MBIA's regulatory expert, he is a Professor
22 at N.Y.U., he goes into a significant amount of detail
23 demonstrating, using the examples of these TARP and other
24 bailouts as additional reasons that the work done by The
25 Department was reasonable. So, I think it's there on every,
26 on every viewpoint.
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1 PROCEEDINGS - KASOWITZ2 Now, I want to be clear about one thing. We are3 not questioning the propriety or prudence of what the4 Federal government did with respect to these bailouts during5 the financial crisis -- not at all.6 We just think that they are interesting7 illustrations and helpful ones, when you look at what The8 Department did, and we think it's rather ironic that the9 banks, who benefitted from that enormously fast action
10 involving billions and billions of dollars, can come into
11 this courtroom and claim that work that was far more
12 extensive, conscientious, detailed, and really much more in
13 the weeds, can, that they can challenge that for any reason.
14 So, your Honor, now I want to turn to an argument
15 that was made by the banks, concerning another argument made
16 by the banks, concerning the statutory accountant that's an
17 expert for MBIA here, Mr. Buttner.
18 The banks try to give the false impression that Mr.
19 Buttner testified at his deposition that the errors in the
20 hypothetical extreme stress scenario were material to the
21 Department's decision to approve the transformation, and
22 that's just wrong, your Honor.
23 Mr. Buttner, of course, never gave that testimony.
24 I will show exactly what he did say. The argument that they
25 made -- that argument is at pages 1307 to 1308 of the
26 transcript.
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1 PROCEEDINGS - KASOWITZ2 It's not what Mr. Buttner was asked, it's not what3 he testified to. In fact, Mr. Buttner was asked, assuming4 that there was an actual $500 million swing in policyholder5 surplus in one year, bringing it from a positive number to a6 negative number, whether that swing was, quote, material,7 close quote.8 And, from his perspective in that, within the9 confines of that question, from his perspective as a
10 statutory accountant he said, yes, if the policyholders'
11 surplus in one year, goes from a negative 291 million
12 instead of positive 362 million, that would be a material
13 difference.
14 I don't think that's controversial, nor do I think
15 it's relevant here. The transcript for that Q and A was at
16 Buttner's deposition at pages 361, 362.
17 What Mr. Buttner was not asked, your Honor, what he
18 did not testify to, was whether such a $500 million swing in
19 policyholder surplus, under the hypothetical extreme stress,
20 break the bank scenario, would have made any difference to
21 the Department's decision to approve the transformation.
22 He wasn't qualified, wouldn't have been qualified
23 to answer that question any way, your Honor. He is not a
24 regulator, he is not an expert in regulatory process and he
25 had no involvement in the Department's review of the
26 transformation, but he did not give that testimony in any
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1 PROCEEDINGS - KASOWITZ2 event.3 So, and I am going to get to this a little bit4 later when we talk about the break the bank hypothetical5 extreme stress situation here. I thought that Mr. Holgado,6 I thought it was covered in detail before, I thought Mr.7 Holgado dealt with it very well yesterday.8 We are not going to go into a lot of detail about9 it, but we will point out that even in that break the bank
10 situation, the results for MBIA over the time, over time,
11 showed a far, far, far more positive outcome, both for MBIA
12 and for its policyholders than the banks have showed you.
13 So, as we have seen, as to the people who were
14 actually involved in the transformation, and who were
15 qualified to answer the question as to whether or not the
16 errors that impacted on that break the bank hypothetical
17 extreme stress situation, as to whether or not those errors
18 would have made any difference to them, the testimony has
19 been absolutely consistent, absolutely clear, by former
20 Superintendent Dinallo and Mr. Buchmiller, that it would not
21 have made a difference to them.
22 And, I think that, you know, Mr. Holgado did a good
23 job of this, but just to recap quickly, Mr. Buchmiller
24 explained that it wouldn't have made a difference to him
25 because, among many other things, MBIA had substantial
26 contingency reserves of over $1.3 billion, a portion of
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1 PROCEEDINGS - KASOWITZ2 which The Department would have allowed MBIA Corp to release3 in order to restore its surplus during the 1 or 2-year4 period in which it would have been negative, and that's from5 paragraph 84 of Mr. Buchmiller's supplemental affidavit and6 also from paragraph 75 of Superintendent Dinallo's7 affidavit.8 So that MBIA, the bottom line is MBIA had more than9 enough contingency reserve to cover that hypothetical break
10 the bank situation, and as we pointed out in our argument,
11 that's exactly what contingency reserves are supposed to be
12 used for.
13 And, in fact, to the extent that Mr. Buttner's
14 testimony relates to this at all, your Honor, it's entirely
15 consistent with what Mr. Buchmiller said, as Mr. Buttner
16 states in paragraph 149 of his affidavit, the changes to the
17 extreme stress scenario were quote, before any adjustment to
18 the projected December 31, 2009 contingency reserve of
19 approximately $1.3 billion, close quote.
20 Mr. Buttner agreed that the release of the
21 contingency reserves would have easily made up for any
22 negative policyholder surplus and, as Mr. Buttner
23 recognized, were precisely there to offset any hypothetical
24 shortfall, and that's also in paragraph 149.
25 Now, but this brings us to a question that has been
26 raised by the banks, an argument made by the banks with
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1 PROCEEDINGS - KASOWITZ2 respect to what is the appropriate legal standard concerning3 the effect of errors and the like, and the banks have4 argued -- I guess their arguments are a bit of a moving5 target.6 We heard them and I cited the places in the7 transcript. We heard them during their initial argument.8 They made the argument that if there is any error in the9 record, then the Court must annul the approval of
10 transformation -- without discretion, not arbitrary and
11 capricious, nothing.
12 Then, they kind of move to some argument where
13 well, if the, if there is, if there is an error and it's
14 material, then, you know, that means that the Court needs to
15 annul the approval of the transformation.
16 They cited a case that they say is, and I don't
17 know whether the banks say that this case was on all fours,
18 but I certainly recall sitting, listening to the argument
19 that they said this is very important, this is really, this
20 solves the problem.
21 The case they cite is this Byrne versus Board of
22 Standards case, the First Department 2004-case Mr. Holgado
23 discussed yesterday.
24 And, the banks argue, the mere presence of any
25 material error in the information considered by The
26 Department, MBIA, that the decision must be thrown out as a
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1 PROCEEDINGS - KASOWITZ2 matter of law, without regard to whether that error would3 have made any difference to the, to the agency's4 determination.5 And, the banks' counsel argues that the definition6 that must be given to materiality is the definition that is7 applied in securities cases. They say that the information8 is, according to that definition in the securities cases,9 they say that the information is material, if a reasonable
10 investor would have wanted to see it.
11 But, your Honor, we don't accept the proposition
12 that a materiality standard in a securities or a fraud case
13 is applicable here anyway, under Article 78, but even if
14 those cases, in order for the misrepresentation, if there is
15 a mistake or a misrepresentation, in order for it to be
16 meaningful, it has to have consequences. It has to have
17 been sufficient so that it would have changed the investor's
18 decision.
19 That's really the key here, your Honor. The issue
20 here is, whether the errors that the banks have talked about
21 in this hypothetical break the bank situation that Mr.
22 Buchmiller said he never foresaw happening anyway, whether
23 they would have been sufficiently important to Mr.
24 Buchmiller or to Superintendent Dinallo to change their
25 minds and, of course, their testimony has been very
26 consistent. The answer is no.
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1 PROCEEDINGS - KASOWITZ2 And so, you know, in our situation, in talking3 about this case, the real key here is, that in talking about4 the standard, the key here is, can the banks meet their5 burden of showing not only were there errors, but were these6 errors sufficiently important to the determination of the7 agency, Superintendent Dinallo, Mr. Buchmiller and others,8 that it would have caused them to change their minds about9 approving the transformation.
10 As we have shown, the banks do not and cannot come
11 close to satisfying that burden. This is confirmed, your
12 Honor, by the Byrne case, as I think Mr. Holgado pointed out
13 yesterday.
14 In Byrne, the Court affirmed annulment of the
15 issuance, by the City's Board of Standards, of a certificate
16 of occupancy covering work done on a building. It was a C
17 of O that necessarily had to be predicated on the completion
18 of work, in compliance with building plans and applicable
19 law, where the Petitioner showed that there had been, quote,
20 a total lack of compliance, close quote, with the plans and
21 with the law, when the C of O was issued, and where it was,
22 quote, the undisputed fact that none of the work that was
23 required to be done had been completed prior to the issuance
24 of the C of O, and that is at 774 NYS2d at 497.
25 So, it couldn't be clearer that the Byrne case
26 factually is about as far from this case as you can possibly
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1 PROCEEDINGS - KASOWITZ2 get.3 It also couldn't be clearer that, that when the4 Byrne Court said in the language the banks like to quote,5 that quote, no judicial deference is owed to an agency's6 statutory interpretation, that is premised on an erroneous7 factual conclusion. That's at 497 as well.8 What the Court meant was, an erroneous factual9 conclusion that, if corrected, would have had
10 consequences -- would have and should have changed the
11 agency's decision.
12 Indeed, the Court made it absolutely clear, that it
13 disagreed with the proposition that, quote, any violation,
14 close quote, of the plans or applicable law, quote, no
15 matter how inconsequential, close quote, meant that the C of
16 O needed to be revoked.
17 (Continued on next page.)
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1 MBIA Respondent-Kasowitz2 T43 MR. KASOWITZ: That's at page 498, at footnote4 3.5 So here, Mr. Buchmiller says that the DTA6 errors would not, and should not have made a7 difference.8 Mr. Dinallo agrees. And the department and9 the Attorney General are here three years later, with
10 full knowledge of these errors, defending this case.
11 And they agree that the errors wouldn't have made a
12 difference.
13 Moreover, there is no legitimate dispute that
14 when all the errors are corrected, the corrected
15 results provide even more support for the approval of
16 transformation.
17 Let's take a look at slide no. 6.
18 So you may recall, your Honor, that when we
19 presented, we showed this graph -- which shows that
20 when all of the errors were corrected, that the
21 policyholder surplus in this hypothetical situation,
22 which Mr. Buchmiller said had no probability of ever
23 occurring, but when all of the errors in that
24 situation, the extreme stress case situation, were
25 corrected, in the corrected version MBIA's policyholder
26 surplus would have been, by 2054, at $6 billion, rather
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1 MBIA Respondent-Kasowitz2 than at $1 billion, which was in the uncorrected3 version.4 Thanks, Bucky.5 So there is no dispute here, your Honor, that6 there was just no -- these errors, in the context of7 the review and analysis of transformation by the8 department, would not have changed the result.9 So, now, I thought that there would be -- I
10 thought that it would be useful, your Honor, to talk
11 for a minute about how the banks' experts view these
12 errors.
13 I made -- when I presented, I guess, last
14 week, I made the point that the banks' expert, Mr.
15 Greenspan, had discovered this error prior to the time
16 that he had submitted -- prepared and submitted his
17 expert report in this case but did not include any
18 mention whatsoever of the error in his report.
19 He held up his report, 148 pages, 434
20 footnotes. Errors? No, none.
21 So, you know, I was going to -- I am not going
22 to go through that presentation again. It's in the
23 record. But I was interested to hear that when the
24 banks got up, they really had nothing to say about
25 that.
26 No explanation whatsoever for why the court
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1 MBIA Respondent-Kasowitz2 should not consider the significance of their main3 financial expert, the person that they retained to do4 this work, at enormous expense, over an extended period5 of time. Didn't even see fit to make any mention6 whatsoever of those errors in his report.7 The only inference that can be drawn from8 that, your Honor, is that those errors, as Mr.9 Buchmiller has testified, as Superintendent Dinallo has
10 testified, in the context in which they were made,
11 weren't consequential, didn't make enough of a
12 difference to have changed the minds of the people who
13 approved transformation.
14 Now would be a good place, because I'm going
15 to go on to something else, to take a break.
16 MR. GIUFFRA: Your Honor, may I ask counsel,
17 how much longer are you going to go today?
18 MR. KASOWITZ: We're going to be going today,
19 Bob.
20 MR. GIUFFRA: I just want to find out.
21 THE COURT: We can discuss that. Okay, let's
22 take a ten-minute break now.
23 MR. KASOWITZ: Thanks, your Honor.
24 (Short recess taken)
25 THE COURT: I need a cup of coffee for this
26 stuff.
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1 MBIA Respondent-Kasowitz2 MR. GIUFFRA: We haven't gotten to modeling3 yet.4 THE COURT: Okay.5 MR. KASOWITZ: Thanks, your Honor.6 Now, your Honor, on Friday the banks attempted7 to rehabilitate their argument regarding the8 department's supposed reliance on allegedly stale data9 in the RMBS sector.
10 Their arguments on this issue can be found at
11 the transcript at pages 1531, 1567 through 74 and 1577
12 through 84.
13 We went through this issue last Tuesday.
14 That's at pages 1258 through 1263 of the transcript,
15 but I think that there are a few additional points that
16 are worth mentioning.
17 On Friday the banks cited to the transcript of
18 one of Mr. Buchmiller's modeling sessions with members
19 of MBIA's IPM Group.
20 During that session Mr. Buchmiller was given
21 the opportunity, but did not, utilize data from
22 December 31, 2008, rather than data from the third
23 quarter of 2008.
24 The banks argue that this is a $1.9 billion
25 decision, and in support of that argument, they rely on
26 the affidavit of their expert, who we have mentioned,
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1 MBIA Respondent-Kasowitz2 Mr. Greenspan, who they claim, quote, "took the3 information that was available as of 12/31/08 and ran4 it through MBIA's model," close quote.5 That's at page 1570 of the transcript, lines 16 through 10.7 They say that this work that he did revealed8 this $1.9 billion in projected losses.9 Now, the banks would have the court believe
10 that Mr. Greenspan's arguments concerning staleness of
11 MBIA's data stand unrebutted. They made this argument
12 that we have had no response to it.
13 That's because in all of the many hours and
14 days of that is the banks have presented, they have not
15 referred to the testimony of MBIA structured finance
16 modeling expert, Mr. Finkel.
17 When the banks did address Mr. Finkel, it was
18 only to discuss this review of BlackRock's modeling.
19 Never did they address Mr. Finkel's review of MBIA's
20 modeling, methodologies, data and assumptions.
21 Through his affidavit, your Honor, which is
22 extensive, Mr. Finkel lays out in meticulous detail why
23 the models, the methodologies and the assumptions
24 utilized by MBIA and relied upon by the department at
25 the time that the transformation was approved and
26 reviewed were reasonable and appropriate.
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1 MBIA Respondent-Kasowitz2 We will also see, your Honor, that not only3 does Mr. Finkel demonstrate the reasonableness and4 appropriateness of the models and methodologies and5 assumptions relied on by MBIA and why this is not stale6 data, but we're going to see in a few minutes why7 another of the banks' experts says the same thing,8 backs him up.9 So Mr. Finkel explicitly rebuts Mr.
10 Greenspan's claim of staleness. In part 5 of his
11 affidavit, Mr. Finkel details the four key reasons why
12 the banks and their experts are wrong to claim why MBIA
13 should have used fourth quarter data in its modeling
14 during the period the transformation was under review.
15 First, he describes how MBIA's loss
16 projections at the time represented cumulative lifetime
17 expected losses, which far exceeded the fourth quarter
18 2008 increase in early-stage delinquencies which the
19 banks claim was ignored by MBIA.
20 That part of his opinion is at paragraphs 214
21 through 219 of his affidavit.
22 Second, Mr. Finkel explains that a short-term
23 spike in data, like the one relied on by the banks and
24 their experts, does not necessarily warrant a
25 fundamental change in MBIA's long-term projections, as
26 early-stage delinquencies, Mr. Finkel points out, can
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1 MBIA Respondent-Kasowitz2 be very volatile and, in fact, those early-stage3 delinquencies declined rapidly in early 2009.4 That part of Mr. Finkel's opinion can be found5 at paragraphs 214 and 220 through 225 of his affidavit.6 Third, and as we have previously discussed,7 and as MBIA had informed Mr. Buchmiller during his8 review, MBIA's existing loss projections included a9 heightened level of losses and default rates in the
10 short term, both of which closely tracked actual
11 performance during the fourth quarter of 2009 and into
12 the first quarter -- I'm sorry, your Honor-- the fourth
13 quarter of 2008 and the first quarter of 2009, and
14 those parts of his opinion are also at paragraph 214
15 and at paragraphs 226 through 233.
16 Now, your Honor, on Friday the banks implied
17 that MBIA 'decision to run second-lien RMBS models in
18 the first quarter of 2009 and to raise its reserves at
19 that time undercuts the fact that MBIA's loss
20 projections were, quote, "tracking," close quote, in
21 the fourth quarter.
22 Instead, according to the banks, that
23 indicates that MBIA had something to hide by not
24 running its models in the fourth quarter.
25 Your Honor, nothing to be further from the
26 truth. As Mr. Finkel testifies in his affidavit, MBIA
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1 MBIA Respondent-Kasowitz2 appropriately wanted to wait to review additional data3 to determine what, if any, trends were developing at or4 around that time before making a decision to rerun5 models, which, again -- and these models are lifetime6 projections of losses.7 That's at paragraphs 214 through 219 of his8 affidavit.9 Your Honor, as Mr. Finkel points out, when
10 MBIA did run its models in the first quarter of 2009,
11 using the most up-to-date data available at that time,
12 its increase in reserves fell well within the
13 reasonable stress test conducted by MBIA in the third
14 quarter of 2008 and during the department's review.
15 Mr. Finkel at paragraphs 239 through 256 of
16 his report goes through a very detailed analysis of
17 that increase in reserves.
18 Finally, Mr. Finkel explains that MBIA
19 believed that these loan defaults at or about this time
20 may have been due to idiosyncratic risk caused by
21 ineligible loans in its portfolio which MBIA believed
22 was captured by the $1 billion increase in its reserves
23 that it had done in the third quarter of 2008.
24 Now, your Honor, as the modeling transcript
25 cited -- I'm sorry, your Honor. For that portion of
26 his opinion, you should look at paragraphs 175 through
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1 MBIA Respondent-Kasowitz2 281 of Mr. Finkel's affidavit -- 181. I'm sorry, your3 Honor.4 Remember, your Honor, as the modeling5 transcript cited by the banks makes clear, this6 modeling transcript with the discussion between Mr.7 Uppuluri and Mr. Buchmiller, it was Mr. Buchmiller's8 choice as to which data to review.9 This is important, your Honor, because
10 although the banks may disagree with Mr. Buchmiller's
11 choice, they have in no way established that his choice
12 was arbitrary or capricious or irrational.
13 That's because the factual record in this case
14 is clear that Mr. Buchmiller's decision to review
15 MBIA's third quarter models was eminently rational and
16 reasonable.
17 As he clearly stated in his file memo, quote:
18 "We reviewed their models to form opinions on their
19 veracity, ability to replicate reality, and internal
20 and external consistency."
21 "Does it work consistently, and is it used
22 consistently?
23 "Whether the assumptions were reasonable at
24 the time made and as fact-based as possible and whether
25 the results were robustly stress tested for worse than
26 expected future results or development."
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1 MBIA Respondent-Kasowitz2 Therefore, Mr. Buchmiller appropriately made3 the reasoned decision to review the models that served4 as the basis for MBIA's then current reserves.5 (Continued on next page)6 (End of take 4)789
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1 PROCEEDINGS - KASOWITZ2 T5 MR. KASOWITZ: So where does this leave us?3 As we previously explained, we are left with4 nothing more than a battle of the experts.5 In the battle of the experts, that does not get it6 done for the banks in upholding the heavy burden they have7 to demonstrate arbitrariness and capriciousness.8 But, in a way, your Honor, as has been the case9 with so many other issues between experts in this case, we
10 have no battle of the experts. We have agreement by the
11 banks' experts with what MBIA's experts have said.
12 So here, while Mr. Greenspan contends that MBIA's
13 use of data from prior to the fourth quarter of 2008 was a
14 modeling error, the banks' other expert, Mr. Paltrowitz, of
15 Black Rock, has testified that The Federal Reserve Bank of
16 New York's reliance in February 2009 on Black Rock's loss
17 analysis, ran as of November 21, 2008, and relying on
18 performance data from September 2008, was reasonable.
19 In that case, your Honor, as Mr. Paltrowitz
20 testified, Black Rock was retained by The Federal Reserve
21 Bank of New York on December 14th, 2008. It was exactly
22 the time period for which the banks say they should have
23 been retained by The Department here and, Black Rock was
24 retained to prepare a valuation analysis for certain assets
25 held by Citibank.
26 What data was Black Rock using in that analysis,
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1 PROCEEDINGS - KASOWITZ2 your Honor? Mr. Paltrowitz has testified about this as3 well.4 Now, October remits in this testimony means5 September dated, your Honor, and second quarter case Kaye6 Scholer data, was using home price data from the second7 quarter of 2008.8 So the valuation covered assets of November 21,9 2008, and here, it's contemplated that the final report
10 would be submitted on January 29th, 2009.
11 "Do you have a recollection as to whether the final
12 report was issued on or about January 29th, 2009?
13 "Yes, I believe it was.
14 "Okay. And then, what can you, again, from your
15 recollection, what period of time then, was Black Rock
16 Solutions drawing data as to the performance of the
17 underlying assets?
18 "Answer: Because of the cut off date of
19 November 21st, we would be using the October remits, which
20 it would have come through as of October 25th, and we would
21 have been using still the second quarter Kaye Scholer data
22 as opposed to the third quarter update.
23 So, let me get this straight, your Honor.
24 The banks here are criticizing the transformation
25 review because MBIA supposedly used stale data, so-called
26 stale data, from the fall of 2008 in some of its RMBS
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1 PROCEEDINGS - KASOWITZ2 modeling, some of it which Mr. Buchmiller reviewed in early3 2009.4 But, their own expert Black Rock, used second5 quarter 2008 and September 2008 data in its analysis for The6 Federal Reserve, submitted on January 29th, 2009, and7 presented to the Federal management on February 12th, 2009,8 right as the NYID here was completing its review of9 transformation.
10 Mr. Paltrowitz said that that was reasonable.
11 It's another situation, your Honor, where there is
12 nothing more than a dispute among experts at most, and here,
13 we see that the expert that the banks have tried repeatedly
14 to argue should have been foisted upon The Department, an
15 expert that used an opaque, black box that the Department
16 could have never discerned, an expert that was heavily
17 conflicted, was nonetheless, an expert that used data that
18 was as dated as the data that the banks are criticizing here
19 was stale.
20 Doesn't work, your Honor. Does not get there.
21 Now, I would like to turn very, very quickly to a
22 couple of other subjects, and then I will be done.
23 We heard some discussion from the banks about other
24 monolines restructurings. We heard these other monoline
25 restructurings should have been a template for the
26 restructuring that was done here.
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1 PROCEEDINGS - KASOWITZ2 One of the things we heard about these other3 monolines restructurings, which were done at or about the4 same time, was that they were, it was this argument that5 this was an inclusive process, an inclusive process that the6 policyholders all had notice and they participated and it7 was wonderful, your Honor, it was really wonderful.8 Well, your Honor the fact is, that the people it9 was wonderful for were the banks. It was not an inclusive
10 process. There were structured finance policyholders who
11 did not have notice of these negotiations that the banks
12 were doing with respect to these other monolines.
13 There were other structured finance policyholders
14 who did not get to sit at the table with these banks and
15 there were other structured policyholders, structured
16 finance policyholders, who did not get to benefit in the way
17 that these banks benefitted.
18 How do we know this? Well, we know it from the
19 banks' expert, Mr. Greenspan. He told us. Let's look.
20 This is talking about the monolines, CIFG
21 restructuring. The question is --
22 "Question: So, there was a concern that there
23 were not sufficient assets in CFIG to pay claims as they may
24 arise.
25 "FTI was advising many of the insurers.
26 "Were there insureds of CFIG who were not
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1 PROCEEDINGS - KASOWITZ2 represented in connection with the negotiations of the CIFG3 restructuring?"4 Mr. Greenspan had testified earlier he was involved5 in that restructuring.6 "Answer: Well, there certainly would have been7 insureds that did not have, for example, their own lawyer."8 Here is the part I like.9 "However, you have CFIG, which has a duty, and I
10 think vigorously carried out its duty to act in the best
11 interests of its policyholders, and of course, you have the
12 insurance regulatory authorities, who also reviewed, as you
13 noted, each one of these commutation and transactions with
14 the Department, again, I believe at least attempting to
15 exercise its appropriate regulatory role."
16 And, exactly the same thing here, your Honor.
17 This was at or about the same time -- 2008.
18 You had exactly the same thing here. You had the
19 Superintendent of the New York Insurance Department
20 exercising its appropriate regulatory role, and as we have
21 seen, it made the reasoned decision, after months and months
22 of work, that the interests of all the policyholders of both
23 National Insurance Co. and the old Insurance Co., that the
24 interests of those policyholders, including specifically
25 these banks, were fully protected.
26 So, let's see, now we have had, we have shown the
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1 PROCEEDINGS - KASOWITZ2 Court the approval letter and we have shown the Court the3 press release that was issued by Superintendent Dinallo, I4 think the day after the approval letter, where he explained5 the basis for his decision.6 The banks hate that letter. They say, they say7 they hate it. They say, you can't look at that letter. I8 mean, you can't look at that press release. It's not the9 letter. You can only look at the letter, not the press
10 release.
11 Well, we want the Court to look at the letter, we
12 want the Court to look at the press release. We want the
13 Court to look at all of the facts and circumstances
14 surrounding transformation. That's what the Court should
15 do, and what it will do.
16 But, let's take a look at the press release that
17 the Superintendent issued when the CFIG restructuring was
18 done.
19 Now, this press release was issued on January 22,
20 2009 which was, I guess, less than a month before
21 transformation was approved and at or about the time that
22 Mr. Buchmiller was continuing to do his work with respect to
23 the review and analysis of transformation.
24 Headline: Dinallo announces approval of agreement
25 to commute troubled credit default swaps and reinsure
26 municipal bonds at CFIG."
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1 PROCEEDINGS - KASOWITZ2 Here is what the press release says -- adding3 stability to the bond insurance industry, in the midst of4 the current credit crisis is good for Wall Street, which is5 so important to New York's economic health, and also for6 cities and towns throughout New York and the nation that7 rely on bond insurance to reduce the cost of borrowing to8 meet their infrastructure needs.9 That's why New York, which is the primary regulator
10 for most of the bond insurers has been working so hard on
11 this project, Dinallo said.
12 Sounds a lot like, your Honor, sounds a lot like
13 the press release that Mr. Dinallo gave after transformation
14 was approved.
15 Thanks, Bunky.
16 Touches on some of the very same issues and the
17 same areas in which Superintendent Dinallo was, had the
18 power and the authority to exercise, to exercise his
19 discretion. Trying for CFIG to do the same thing that he
20 was trying to do for MBIA.
21 Trying to get the bond markets going, trying to
22 help the economy, trying to do all of this in an
23 extraordinarily, extraordinarily difficult time -- worst
24 time since the Great Depression.
25 The banks didn't have any problem with
26 Superintendent Dinallo when he was supervising a
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1 PROCEEDINGS - KASOWITZ2 restructuring which resulted in them getting commutations3 for billions of dollars, and also helping to get the bond4 markets going in New York, but that very same5 Superintendent, less than three weeks later, all of a sudden6 becomes irrational, unreasonable, not able to do his job,7 complicit in a theft, your Honor? It's nonsense.8 Superintendent Dinallo acted just as reasonably,9 just as rationally, just as conscientiously with respect to
10 the MBIA transformation as he did with respect to, as he did
11 with respect to the other monolines restructurings.
12 The only difference here is, your Honor, these
13 banks, who kept other policyholders out of those
14 restructurings came to have, at some point, some objection
15 to what the Superintendent did in the exercise of his
16 reasoned discretion.
17 Doesn't sound like a very principled position for
18 these people to take to accuse the Superintendent, who had,
19 who they are saying had acted so reasonably here, and then
20 three weeks later to be guilty of theft.
21 The reason is, your Honor, there is absolutely no
22 basis to it whatsoever.
23 Now, the banks have argued that The Department
24 should have waited for -- at various times they made this
25 argument -- that The Department should have waited for both
26 the completion of PWC's, 2008-year end audit and the
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1 PROCEEDINGS - KASOWITZ2 Department's triennial examination of MBIA before approving3 the transformation.4 They made that argument in, among many other5 places -- the hearing on May 15th at page 277, lines 176 through 25.7 In their rebuttal argument, the banks have shifted8 a little bit, I think, and they now seem to be saying that9 it's not necessarily their position that The Department
10 should have waited until examination was complete before
11 approving transformation, but rather that The Department
12 should have completed their triennial exam sooner.
13 And, according to the banks, they should have
14 started it earlier than they did and gotten it done sooner
15 than they did. I think that's on the May 31st hearing at
16 1439, lines 20 through 26.
17 So now, I am assuming, your Honor, that the banks
18 are making this argument about wanting to get, that the
19 results of this triennial exam should have been completed
20 whenever it was done, because those results would have
21 supported the position that the banks were taking here and,
22 it would have effected the Superintendent's decision in a
23 way that the banks would have liked. Meaning, that he
24 wouldn't have approved transformation.
25 Well, your Honor, that's not much of an argument
26 based on how this examination and the PWC audit turned out.
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1 PROCEEDINGS - KASOWITZ2 First, your Honor, turn to timing, that kind of3 stuff. You can always argue for a regulator to take more4 time, wait for additional information, delay and the like5 and of course, the banks weren't arguing for that when they6 were seeking the approval by the Superintendent of the other7 monolines restructurings, in which they were getting8 commutations for a billion dollars, but here, after the9 fact, years later, they can argue that he should have taken
10 more time.
11 Now, that's contradicted, as we showed your Honor,
12 by their own expert. Superintendent Muhl testified that
13 quote, at some point a decision, yes, should be made.
14 Mr. Muhl recognized that there is always the
15 possibility that additional information, including new
16 financial statements, can become available. That's at pages
17 144 through 145 of his transcript.
18 He also agreed that it was within the discretion of
19 the Superintendent to determine when he or she had enough
20 information to make a decision, and that's at his transcript
21 at page 145.
22 In this situation, Superintendent Dinallo
23 determined that he had sufficient information to make his
24 determination by mid February 2009.
25 In any event, your Honor, there was nothing in the
26 audit, audited financial statements or final report on
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1 PROCEEDINGS - KASOWITZ2 examination that was likely to have had any different impact3 on what Superintendent Dinallo decided. Despite the banks'4 initial assertion that PWC had issued a going concern5 opinion, that was a statement that the banks had to retract.6 It was a mistake on their part. They retracted it at the,7 on May 15th.8 PWC, in fact, issued an unqualified audit opinion9 for MBIA's 2008 loss reserves and financial condition, which
10 is the highest opinion that an auditor can issue.
11 In doing so, PWC said that MBIA's financial
12 statements, quote, present fairly, in all material respects
13 MBIA's financial condition.
14 In our opinion, the financial statements referred
15 to above, present fairly and in all material respects, the
16 admitted assets, liabilities, and capital and surplus of the
17 company, as of December 31, 2008 and 2007, and the results
18 of its operations and its cash flows for the years then
19 ended on the basis of accounting described in note two.
20 Additionally, as part of the audit for MBIA, for
21 2008-year end, PWC employed an actuary and a team of
22 structured finance specialists to review MBIA's loss
23 reserves.
24 At the conclusion of that review, the actuary
25 issued an unqualified actuarial opinion, and opined that
26 MBIA's loss reserves complied with the Insurance Law and
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1 PROCEEDINGS - KASOWITZ2 applicable statutory accounting principles.3 You can find that, your Honor, in Mr. Buttner's4 affidavit at paragraph 17 and 58 through 61.5 Specifically, PWC opined that MBIA's loss reserves,6 okay, we know it's an opinion because it says "opinion".7 In my opinion, the amounts shown in Exhibit A for8 the sum of items 1 and 2, sum of items 3 and 4, sum of items9 1,2, 5 and 6, meet the requirements of the Insurance Laws of
10 New York, are consistent with reserves computed in
11 accordance with generally accepted actuarial standards and
12 principles, make a reasonable provision for all case bases,
13 unpaid loss and loss adjustment expense obligations of the
14 company, under the terms of its contracts and agreements.
15 Your Honor, I should note that since this time,
16 MBIA has gotten three additional clean audit opinions from
17 PWC.
18 So, it doesn't seem like there would have been
19 anything there that would have changed the Superintendent's
20 mind, and at the same time that this was happening, Mr.
21 Buchmiller was doing the work with respect to approval, but
22 he was also doing the work with respect to the triennial
23 exam. He has testified about that.
24 He testified about that with respect to the work
25 that he was doing in July of 2008 and he testified that he
26 was part of the team that was working on not only
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1 PROCEEDINGS - KASOWITZ2 transformation, but also the triennial exam.3 He testified that had the Department waited for the4 completion of the triennial examination, it would have,5 which would have been May in the following year, it would6 have completely undercut the primary purpose of7 transformation.8 Quote, the need to unfreeze the municipal debt9 insurance market in order to allow municipalities to secure
10 debt financing through insured bond offerings.
11 That's