MBIA lawsuit

Early last month a state court judge in New York dismissed five of the six counts of a lawsuit MBIA filed against Merrill Lynch a year before.

MBIA was a bond insurer, and it lost big in the recent credit crisis as the insurer of CDOs issued by Merrill Lynch.

In the lawsuit, MBIA claimed that Merrill Lynch had fraudulently induced it to enter into these transactions as part of a scheme to “offload billions of dollars in deteriorating U.S. subprime mortgages and other collateral that [it] held on its books by packaging them ... or hedging their exposure through swaps with insurers.”

Merrill Lynch's reply, "So what? We're allowed to look for suckers, and you're allowed to be a sucker."

The court's response to MBIA, "You're a Big Boy." MBIA and its affiliate had contractually disclaimed reliance on any representations by Merrill Lynch as to the quality of those CDOs, so the court dismissed causes of action for fraud in the inducement, fraud by omission and negligent misrepresentation without regard to the truth of their accusations.

The contract claim that will go forward involves the theory that Merrill Lynch had promised to deliver securities of “AAA” credit rating quality, but had failed to do so when it delivered securities which had received but did not deserve such a rating.