NY regulators poised to act on ailing MBIA

With MBIA Insurance running out of cash and lawsuits against Bank of America and ResCap still not settled, New York financial-services regulator Ben Lawsky (above) is in a very tough spot. (Bloomberg via Getty Images)

Time has just about run out for MBIA Insurance Corp. — once one of the country’s most respected specialty insurers.

New York state regulators are poised — within “weeks or perhaps days” — to seize the company’s money-losing mortgage insurance arm because it is running out of cash, a source close to the situation said.

The company ran into trouble when it guaranteed billions in mortgage-backed securities that Wall Street peddled to investors — bonds that blew up when the housing bubble burst.

Benjamin Lawsky, the superintendent of the state’s Department of Financial Services, MBIA’s regulator, is interviewing advisers to help it seize the business, a second source claiming direct knowledge of the matter said.

MBIA Insurance said it had no information a seizure was imminent.

MBIA Insurance, which has sued both Bank of America and its Countrywide Financial unit and Ally Financial’s ResCap unit, claiming it was duped into backing mortgage bonds the lenders knew were junk, hoped to settle those claims before it ran out of cash.

Both settlement talks are at an impasse — and cash is running out.

With a likely MBIA Insurance seizure facing him, Lawsky finds himself in a tough spot that sources said he has worked hard to avoid.

In 2009, his predecessor approved MBIA’s controversial move to split itself in two — between its municipal bond insurance arm and its troubled mortgage arm.

A Lawsky move to seize MBIA Insurance could strengthen claims — already made by BofA — that the previous regulator should have known the mortgage arm would fail.

BofA, looking to limit its potential payout to MBIA, claims assets were improperly transferred out of the mortgage insurance unit.

Lawsky’s predecessor, should BoA’s claim win out, would in essence have aided the “fraudulent conveyance.”

MBIA Insurance’s troubles have been a long time coming — and sources have raised questions about why Lawsky did not seize MBIA’s mortgage arm sooner.

Similar insurers, AMBAC and FGIC, were seized when they had more assets than MBIA Insurance has now, several sources said.

“Ordinarily, he would have done this already,” a source said.

But legally Lawsky needs to take over an insurer only when he believes it is insolvent, the source added.

In its lawsuits against BofA, ResCap and others, MBIA Insurance hopes to recover $3.6 billion — more than half its $5.1 billion in claims. That is a far higher recovery than its peers have managed.

That would certainly rescue the troubled insurer — and eliminate any need for Lawsky to seize it.

But MBIA Insurance lost its best shot at a settlement this week when a Manhattan judge refused to rule on the insurer’s motion in its case against BofA.

That meant MBIA’s claims would have to be determined at trial — which could be a year away.

Ironically, Lawsky, if he seizes MBIA Insurance, might have more flexibility to to reach a settlement with BofA, the source said.

Lawsky’s office and BofA declined comment.