Hedge Funds Sue Over MBIA Reorganization

Mar 12 2009 | 4:12am ET

A pair of hedge funds has filed a class-action lawsuit against bond insurer MBIA Inc., seeking to undo its recently announced reorganization.

Aurelius Capital Management and Fir Tree Partners called MBIA’s move last month to split its U.S. municipal bond business from its structured finance business “the height of insidious greed.” According to the lawsuit, filed yesterday in New York federal court, says the reorganization, designed to allow MBIA to begin writing muni bond insurance again, unfairly discriminates against the owners of some $240 billion in debt insured by MBIA.

The hedge funds allege that the split only helps MBIA’s investors, executives and municipal bond policyholders. The federal government, by bailing out banks and agreeing to share some losses, “is one of the largest victims of this looting,” the lawsuit says.

The New York State Department of Insurance approved the split last month. MBIA says that both the muni unit and structured-finance business are solvent; Eric Dinalli, New York’s insurance superintendent, says the latter should have enough capital to keep paying its claims. Moody’s Investors Service seems somewhat less sanguine about its financial health, immediately cutting its rating to B3, six levels deep in junk bond territory.

The Aurelius and Fir Tree lawsuit asks the court to reverse the split of the MBIA divisions.

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