Insurers Say Big Banks Knew about Toxic RMBS

Article excerpt

Byline: Patrick McGee

Municipal bond insurers would still be thriving today if big banks hadn't defrauded the insurers.

That's what executives representing two big bond insurers told a state hearing Wednesday. They claim they were tricked by banks into wrapping toxic residential mortgage-backed securities. They said the banks now refuse to comply with contracts committing them to repurchase defective loans. Such arguments have been working through the judicial system since 2008. In recent months insurers have been seeking legislative and regulatory assistance to pressure banks into responding.

Losses suffered by insurers from mortgage-backed securities were big enough to collapse most of the companies involved in the business and reduce insurance penetration to less than 10% of the market. Potential winnings from ongoing litigation and out-of-court settlements could be enough to revitalize the industry, executives said before the New York State Assembly Committee on Insurance.

"It's very clear that problems surrounding the RMBS securities have decimated the financial guarantee insurance business," said Bruce Stern, executive officer of government and corporate affairs at Assured Guaranty Ltd. "We're hoping ... to put more pressure on these people to do the right thing."

At Sept. 30, Assured had paid $2.8 billion in claims to RMBS investors. According to testimony, Assured has reviewed 36,000 loan files totaling $5.3 billion, identifying more than 31,000 with breaches of contract that could force banks to buy back loans.

Insurers say most of the products were defective from the start. MBIA Inc., once the most-active insurer and now an active plaintiff, had paid $4.2 billion in mortgage-backed claims at Sept. 30. Its CEO, Jay Brown, told the hearing that he expects MBIA to pay more than $1 billion in future claims. …