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.

Kraft and Cadbury, continued

I'll just do some quick link farming today, to catch us up on Kraft/Cadbury matters.

An analyst's note from Merrill Lynch says: "The third quarter offers Kraft a chance to demonstrate that 'old Kraft' is continuing to turn the corner before potentially pairing up with Cadbury.

But there is no luxury of time. Under the Takeover Panel's deadline, Kraft must make an offer by the end of the business day on November 9 or walk away for six months.

Kraft will report those third-quarter reports later today. Here is a preview.

Kraft's transaction info is here.

And Cadbury's response? voila!.

Springfield and MetroPCS

David Wighton writes "Wall Street Dispatch" for the wonderful peach-colored Financial Times.

His column today carries a fine discussion of the American "addiction" to litigation, as it affects Wall Street right now. In the process, he draws a connection I hadn't thought of before.

"In February," he writes, "Merrill Lynch repaid the City of Springfield, Massachusetts about $13.9 million for collateralized debt obligations it had sold to the municipality with the permission of city officials."

That's true, of course, and I've made a couple of references to that dispute in my other blog, Pragmatism Refreshed.

What I hadn't realized is that the old rule about the need to punish every good deed applies here. Wighton points out that after Merrill Lynch repaid the disputed amount, the Mass secy of state "promptly launched a fraud case against Merrill."

I also wouldn't have thought to make a connection between that fraud case and a civil action brought this week against Merrill Lynch in connection with auction-rate securities. Wighton tells me that cell phone operator MetroPCS has filed a lawsuit claiming that Merrill didn't properly explain the risks, selling auction-rate securities to MetroPCS as "low-risk and highly liquid," in compliance with that company's investment policy.

Why was a cell phone company interested in auction-rate securities at any rate? Wighton doesn't spell it out, but if I understand him accurately this was a way of saving money for its employees' pension plan. I'll have to look into that a bit.

Wighton's over-riding point is that companies (and municipalities) "across the US are considering taking an unusual step to counter disappointing returns from their corporate treasuries: legal action."

We've lost the ability to suck it up and move forward. We always have to sue somebody. We ought to learn the stereotypical stiff-upper lip from Mr. Wighton's fellow countrymen.

He's got a point.