MBIA Sued by Banks for Business Split

NEW YORK -- MBIA (MBI Quote) is the target of a lawsuit by a group of 18 financial institutions claiming that the bond insurer's separation of its businesses early this year was fraudulent, a report says.

The Wall Street Journal said the lawsuit was filed in New York state court on Wednesday afternoon by a group of U.S. and foreign banks including JPMorgan Chase(JPM Quote), Bank of America (BAC Quote), Morgan Stanley (MS Quote), Canadian Imperial Bank of Commerce(CM Quote), Barclays(BCS Quote), and UBS (UBS Quote).

MBIA split its operations during the first quarter to separate its traditional municipal bond insurance business from the riskier operations that had led to five consecutive quarterly losses.

According to Journal, the banks believe MBIA Insurance is undercapitalized and won't be able to write new insurance. The paper said they specifically object to a transfer of $5 billion in cash and securities to a dedicated municipal-bond insurance company from the main insurance business.

In reporting its first-quarter results earlier this week, MBIA said it didn't write any new policies during the quarter because of downgrades of its insurance financial strength credit ratings last year. The company said it doesn't expect to write a significant amount of new business until its ratings are upgraded -- and added that an upgrade is unlikely in the near future.

The paper noted that similar lawsuits have been brought against the bond insurer in recent weeks by hedge funds and investment funds that own debt securities issued or insured by MBIA.

MBIA shares lost 45 cents, or 7.3%, to close at $5.69 on Wednesday, and tumbled 56 cents, or nearly 10%, to $5.13 in aftermarket electronic trading.