MBIA Files Suit Against Merrill Lynch

The Armonk, New York-based MBIA, the largest bond insurer in the country, has filed two lawsuits against two separate Merrill Lynch & Company businesses for selling protections against mortgage-debt defaults. The suit was filed with the New York State Supreme Court.

The purpose of the legal action was meant to recover $5.7 billion in payouts on credit-debt swaps and other related insurance that was sold against collateralized debt obligations.

According to MBIA, Merrill Lynch deliberately misrepresented what type of debt was being protected. It is alleged that the company intended the sales as a way of ridding themselves of billions of dollars in deteriorating subprime mortgages between July of 2006 and March of 2007. This was the time when homeowner defaults began to shoot through the roof.

Jay Brown, MBIA’s chief executive said in the statement that, “Today’s action is consistent with our intention to pursue all available remedies against those parties whose improper actions have directly resulted in substantial losses for MBIA and its shareholders.”

This lawsuit is just the latest in a series of legal actions taken by bond insurers like MBIA and Ambac Financial Group against companies like JPMorgan Chase and GMAC LLC for authorizing bad home-loan securities.

As a result of the housing slump and the heavy mortgage losses the previous year, MBIA, as well as its competitors, have suffered drops in insurance ratings. MBIA, in particular, was forced to split its guarantee business in two in order to make a return to the municipal-bond market. The unit of MBIA that retained structured-finance guarantees was downgraded by Moody’s Investors Service to a non-investment level.

MBIA itself has been the subject of lawsuits by bond buyers because of the insurance split. Reasons cited for the suits include the fact that the downgraded unit responsible for guarantees their notes dropped 55% on the NYSE composite trading over the last year.

Merrill Lynch, which was the nation’s largest CDO underwriter prior to the collapse of the market, had agreed to sell itself to Bank of America in a bid to stay solvent.

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