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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: TRIAL TERM PART 39 ---------------------X ABN AMRO BANK N.V.; BARCLAYS BANK PLC; BNP PARIBAS; CALYON; CANADIAN IMPERIAL BANK OF COMMERCE; CITIBANK, N.A.; HSBC BANK USA, N.A., JP MORGAN CHASE BANK, N.A.; KBC INVESTMENTS CAYMAN ISLANDS V LTD.; MERRILL LYNCH INTERNATIONAL; BANK OF AMERICA, N.A.; MORGAN STANLEY CAPITAL SERVICES INC.; NATIXIS; NATIXIS FINANCIAL PRODUCTS INC.; COOPERATIEVE CENTRALE RAIFFEISEN BOERENLEENBANK B.A., NEW YORK BRANCH; ROYAL BANK OF CANADA; THE ROYAL BANK OF SCOTLAND PLC; SMBC CAPITAL MARKETS LIMITED; SOCIETE GENERALE; UBS AG, LONDON BRANCH; and WACHOVIA BANK, N.A., PETITIONERS, - against ERIC DINALLO, in his capacity as Superintendent of the New York State Insurance Department; the NEW YORK STATE INSURANCE DEPARTMENT; MBIA INC.; MBIA INSURANCE CORPORATION; and NATIONAL PUBLIC FINANCE GUARANTEE CORPORATION (f/k/a MBIA INSURANCE CORP. OF ILLINOIS), RESPONDENTS. ---------------------X INDEX NO: 601846/09 60 Centre Street New York, New York June 1, 2012 BEFORE: HONORABLE BARBARA R. KAPNICK, Justice

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PROCEEDINGS - STEINBERG THE COURT: Good morning. MR. HOLGADO: Good morning, your Honor. MR. STEINBERG: Good morning. THE COURT: Well, I guess Mr. Kasowitz will get here. MR. KLEIN: He will be here shortly, your Honor. I will try to take his place for a few minutes. THE COURT: You want to sit in his chair? MR. KLEIN: I don't care to do that. MR. GREENBLATT: It's off limits. THE COURT: You know your limits. Good morning, Mr. Steinberg. MR. STEINBERG: Good morning. THE COURT: We will let you continue. MR. STEINBERG: Thank you, your Honor. Before I begin, I would like to sort of revisit what I have covered so far to get to where we are. Yesterday, I showed you again the two tests of solvency under Insurance Law Section 1309, being the subjective loss assessment test, and the objective market based reinsurance test. We also talked about the State Respondents' argument that the objective and market based reinsurance prong of 1309 should be disregarded, because it would have meant that during the 2008 and 2009 time period, the very

APPEARANCES: SULLIVAN & CROMWELL, LLP Attorneys for Petitioners 125 Broad Street New York, New York BY: ROBERT J. GIUFFRA, JR., ESQ. MICHAEL H. STEINBERG, ESQ. WILLIAM WAGENER, ESQ. MARIE LOUISE HUTH, ESQ.

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PROCEEDINGS KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP Attorneys for Respondents 1633 Broadway New York, New York BY: MARC E. KASOWITZ, ESQ. KENNETH DAVID, ESQ. OFFICE OF THE ATTORNEY GENERAL Attorneys for State Respondents 120 Broadway New York, New York BY: DAVID HOLGADO, ESQ. MARK KLEIN, ESQ. JOSHUA GREENBLATT, ESQ.

NINA J. KOSS, C.S.R., C.M. BARBARA STROH, C.S.R., C.M. Official Court Reporters

PROCEEDINGS - STEINBERG period at issue here, application of the reinsurance test would have meant that every Financial Guarantee insurer was insolvent. But, as I hope I showed you, that wasn't such a far-fetched possibility. The very affidavit submitted by Mr. Moriarity -(Whereupon, Mr. Kasowitz is present at counsel table, at this time.) MR. STEINBERG: Good morning. THE COURT: Good morning. MR. STEINBERG: The very affidavit submitted by Mr. Moriarity in this proceeding described the extensive efforts undertaken by the New York Insurance Department to stabilize, and I quote, a number of FGIs and prevents the collapse of the financial guarantee insurance industry and that's Mr. Moriarity's affidavit at paragraph 20. The idea that that application of the statute would have meant that every FGI was insolvent, doesn't seem so far-fetched after all. In any event, as I showed you, the legislature left it to the Superintendent's discretion for such troubled times. Although the first part of the statute says, "when an insurer fails either one of the insolvency tests, and the insurer shall be deemed insolvent, the Superintendent nevertheless, has the discretion regarding how next to

1 (Pages 1457 to 1460) NINA KOSS - OFFICIAL COURT REPORTER

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PROCEEDINGS - STEINBERG proceed." And finally yesterday, I hope we put to rest the notion that the reinsurance prong of Section 1309 is a dead letter or should be treated as such. First, the State Respondents want you to believe that the reinsurance test of 1309 has never been used. MBIA's experts, in turn, relied upon that assertion. But, as a matter of law, of course the case law is clear, that the repeated disregard of the plain statutory language isn't a license to keep on disregarding it. The law is the law, and it's to be enforced whether early or late. Second, and as a matter of fact, it turns out that the reinsurance test isn't quite as dead as the state Respondents stridently have suggested. I showed you a brief from the Executive Life Insurance Company of New York, in the New York action filed in Nassau County earlier this year by the New York Attorney General's office on the behalf of Financial Services, the successor to the New York Insurance Department. That's PX 1252. As we all saw on that brief, the Department argued exactly the opposite of what is being argued here. In that brief, the Attorney General's office wrote, quote, an inability to assume and to reinsure all of ELNY's

PROCEEDINGS - STEINBERG nearly five months old at the time of the approval and Bridge did not test MBIA's subjective judgements. Instead, Bridge accepted MBIA's judgment without question in those every one of those Executive assessments. And, the State actually has acknowledged there was a serious disconnect between Mr. Dinallo's belief that Bridge were experts, and Mr. Buchmiller's more dismissive view of Bridge. Your Honor, before I turn on to my next subject, yesterday you asked me a question about whether or not the New York Insurance Department and thus MBIA, could rely for its solvency determination in connection with the transformation, could they rely on the statutory examination that was under way at MBIA during the time of the transformation review. I didn't want to speak out of turn yesterday because I wanted to remind myself on the point, but I went back to the exam report, which is, I will just refer your Honor to it -- it's PX 84 -- and that report of examination that was commenced in September 2008 was prepared as of December 31, 2008. In other words, that is the exam report that does not consider, in the statutory time period that it is evaluating, the events thereafter or have a forward looking view towards solvency.

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PROCEEDINGS - STEINBERG policy obligations under the reinsurance and assumption agreement is simply a reflection of the fact that ELNY's assets are insufficient for the reinsurance of all its policy obligations in a solvent corporation," the very definition of insolvency under Section 1309 of the Insurance Law. In ELNY, in that Executive Life case, the policies themselves had become, in essence, uninsurable. That is because when you are looking at a market based test, you get a check, you get to look at what the values would be. Your Honor will recall that I spoke to you a couple of weeks ago about how the New York Insurance Department didn't independently assess MBIA's solvency under the first prong of 1309, the subjective test that considers the loss reserves judgements. Instead, they relied on the solvency opinion provided by Bridge. I am not going to belabor the points here, as I am sure you noticed the Respondents didn't have much to say about Bridge during their presentation. They offered nothing to dispute the facts that there were errors in Bridge's analysis, that the two and a half weeks allotted to Bridge to conduct its assessment was far less than the time needed to do a real solvency test. Bridge didn't conduct any stress tests. The Bridge opinion was based on September 30th, '08 data that was

PROCEEDINGS - STEINBERG It treated, in that very report, the transformation as a subsequent event and it didn't consider the transformation on MBIA's financial condition. So, the exam report, finished 15 months after the approval letter, doesn't help us here either. Now, your Honor, I am going to turn next to a subject that I talked with you about before, and which received some coverage over the past few days, and this is the subject of earned surplus. Earned surplus, you will recall, is contained in the Statute 4105, and 4105(a), just to remind the Court -let's put up slide two. This is what I broke down into what I called the "stop sign" and "speed limit". To remind the Court, the 4105(a) has the prohibition, the flat out prohibition, you cannot declare or distribute any dividend to shareholders except out of earned surplus. Then, there is a speed limit test. And, the speed limit test describes how much you can allow to be paid out of earned surplus. And, in both and only in connection with the, what I call the speed limit part, that can be waived by the Superintendent -- and let's go to slide three. The New York Insurance Department has acknowledged that the earned surplus requirement is binding on all dividends. This is just from our transcript on May 21,

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PROCEEDINGS - STEINBERG 2012, where Mr. Holgado, we were talking about the 4105 first half, i.e., the stop sign is actually relatively not controversial. Goes on. We are not saying a company can pay -MBIA did not pay a dividend out of something other than earned surplus. MR.HOLGADO: That's -- let's go back. I am sorry. THE COURT: Wait, wait, excuse me. It will be for me to decide. MR. HOLGADO: I am sorry. THE COURT: You two don't have argument with each other. What is your objection? MR.HOLGADO: This demonstrative has an excerpt from something I said in the first half of the, first half though. The first thing where it says, the first half is actually relatively not controversial. It cuts off a point because of the way the transcript is worded. We will provide corrections for your Honor. The way the transcript is worded, it makes it -that's the next, end of the sentence, which it is not. What I say at the end of the sentence, the notion that dividend was paid out of anything other than earned surplus is ludicrous. I don't remember if I said "ludicrous" or

PROCEEDINGS - STEINBERG surplus. I am going to circle back to that because we agree that it can't come from -MR. HOLGADO: Your Honor -THE COURT: Look, I know your objections. On your opportunity to respond, which I said I would be happy to give you, I think it will be appropriate here, why don't you bring that up again? MR.HOLGADO: Okay, your Honor. THE COURT: Thank you. MR. STEINBERG: The position of the State -- you cannot, I am going to -- it's a very basic proposition -you cannot create something out of nothing. And, the very fact is, I will come to this, Mr. Kasowitz pointed it out from our papers, he noted the line legal alchemy. I will come to that at the end of my presentation. I want to note it now. The speed limit test that we have been discussing, the discretionary portion, does not allow the Superintendent to override the earned surplus requirement. It's mandatory for all dividends. We cited to your Honor the Deputy Superintendent Michael Moriarity, who admitted at his deposition that the Superintendent has no discretion to waive what we have called the stop sign provision. That is at his deposition at 214, lines 18 to 25.

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PROCEEDINGS - STEINBERG "ridiculous". MR. STEINBERG: Your Honor -MR. HOLGADO: So, they cut that off. I think that's a very misleading demonstrative. MR. STEINBERG: Sorry, I quoted the trial transcript. That is the certified record of these proceedings. THE COURT: I think he said there are lines that are cut off. I don't know. MR.HOLGADO: I am certain it is, your Honor. I am certain it is. I have recently reviewed the transcript. I think it's a misleading demonstrative. I would appreciate he use the actual transcript rather than the one they used to create the demonstrative. It is takes less time to put the transcript up and show what was actually said. I just don't think this demonstrative should be relied on when it's cutting off the actual statement I am making. THE COURT: Do you have the page of the transcripts that this is from? MR. STEINBERG: Yes, I do. Page 752 of the 5/21 transcript, the second one is at page -- 898 from 5/22, and page 752 from 5/21. What is funny about it, I actually agree with Mr. Holgado. They are saying it couldn't have come from earned

PROCEEDINGS - STEINBERG Yet, the approval letter only discusses the speed limit test. It does not talk about the earned surplus. Nor, is the earned surplus mentioned in the certified administrative record, except as I will show you, your Honor, or in any of the post decision materials -- the talking points, the press release, the hedge fund conference statement. In fact, the reason why we are focusing so greatly on this, because there is a remarkable discrepancy here -let's turn to slide five. These are from the notices to admit that we showed you before, but I just want to make something clear about this. The earned surplus, as of September 30, 2008, was 189 million. They have general objections and these objections, but they admit that notice, and as of December 31, 2008, the earned surplus had diminished to $1 million and again, there is an admission. Based on MBIA's insured earned surplus in either September or December, that was what they had available to it. And yet, in connection with transformation they paid the $1.147 billion dividend to MBIA Inc., which in turn, gets used to fund National. Now, where did we get the $189 million number? Aside from their admission, that comes from the regulatory

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PROCEEDINGS - STEINBERG filing that was filed on November 5th, 2008. I want to focus on that date -- November 5th, 2008. The $1 million number, that is for the period ending December 31st, that comes from a regulatory filing after the transformation on February 24, 2009, but is looking as of 12/31/08. So, the question that, at least this brings in my mind, is how does one examine the measurement date? What is the date that you are to look at to evaluate earned surplus? And, your Honor will recall that Mr. Holgado chided me a little bit, and said I must have missed this in law school where you talk about a dicta opinion and holding in an opinion he showed you, the 1985 General Counsel's opinion from the Insurance Department. And, in that General Counsel opinion -- and let's pull out the whole thing. So, this is Exhibit 239. Let's put it up. Now, this is Petitioner's Exhibit 239. And, the point of this, which I will go through and in some detail, is that you measure earned surplus for dividend purposes based on the latest statement filed with the Superintendent. And, I am going to get to the holding. It's here, but I will give it out. The holding from this opinion, which I know your Honor will review on your own, but it's

PROCEEDINGS - STEINBERG Law does State that no dividends can be issued except out of earned surplus. They acknowledge that. But then they say, we are enclosing a copy of the John Smith Insurance Company certified financial statement for the year 1983, which demonstrates net income of $50,319. Therefore, the 50,000 dividend issued earlier in this year, in fact, was out of earned surplus. Okay. So, they say hey, I have a certified financial statement and I am golden. Let me go. Well, the Department had a different view about that. And, the Department advised the company that the use of certified financial statements is unacceptable, unacceptable in determining the amount available for dividend distribution. Instead, we are going to come to this, the holding, the prescribed last statement on file determines the amount of earned surplus available for distribution. (Continued on next page.)

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PROCEEDINGS - STEINBERG the proscribed last statement on file, "the last statement on file determines the amount of earned surplus available for distribution." That's the stop sign provision. Now, let's walk through it just a bit. First of all, let's go to the top. This is a February 8th, 1985 Office of the General Counsel opinion and this relates to a situation where apparently, I don't think there was actually an insurance company called John Smith Incorporated, but the John Smith Incorporated Insurance Company had a problem. Because, the Department review of the company's John Smith Incorporated, December 31 -- highlight the first paragraph. Sorry, go to the second one -- sorry about that. The Department's review of the company's December 31, 1983, March 31, 1984, and January 30, 1984 statements filed with the Department, show a negative unassigned fund. The Department, New York Insurance Department, advised the company on October 17th that the dividend in question appears to have been distributed in violation of 4105. 4105 is the statute we have been discussing. And, the company, of course, had a response. They are not going to say oh, no, we agree. They come up and say, with respect to dividends, this is the indented paragraph, the position of the company was, the Insurance

Petitioners-Steinberg T2 That's the opinion of the Office of General Counsel. Of course, the company writes back. They don't agree, and they say -- let's go to the outer indented paragraph: "We've reviewed 4105 of the insurance laws and do not find the use of the certified financial statements as unacceptable in determining the amount available for dividend distribution. "The part of 4105 that refers to statements on file with the superintendent refers to the limitation as to 10 percent of our surplus policyholders, which was satisfied by the amount of our dividend." They're referring to the speed limit test. Your Honor will recall that when we talked about the first sentence of 4105, what I told you when we discussed it was that that provision did not say what was the measurement date. Instead, the measurement date was referenced in what I call the speed limit provision. So they're making that point. They're making the precise point I told your Honor was going to be an issue. Now, the Office of the General Counsel cites 4105. I'm not going to read it again. It cites definitions of earned surplus.

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Petitioners-Steinberg Let's go to the next page. Then it cites adjusted net investment income, it cites surplus, it does all the things and gets to -- this is the paragraph that Mr. Holgado cited to you. He cited "having reviewed the correspondence." They dispute that they didn't meet the earned surplus test at all as a matter of accounting. They got it wrong as a matter of accounting. You know, sort of like the line at the end that said an insurer cannot mix and match accounting schemes. It's sort of like that. Nevertheless, that's when Mr. Holgado stopped, and he said that I was relying on dicta. But you know what? In fact, the opinion goes on. It says: "The company's reading of the underscored portion of the foregoing provision of section 4105 to the effect that the surplus to policyholders figure is determined from the company's filed statement, while earned surplus is determined from a certified financial statement, is an unsupported assertion inconsistent with the statute together accounting scheme intended by the legislature to govern the operations of insurers." Let's go back to the first page, so we can see where they talk about what was underlined in 4105. Go back to the first page, that indented part right there.
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Petitioners-Steinberg statement on file determines the amount of earned surplus available." That is the -- go back to the first page, the fourth paragraph. Highlight on December 20. It's that last sentence, your Honor: "The prescribed last statement on file determines the amount of earned surplus available." That -- this is PX 239. That last statement on file was filed on November 5, 2008, and that has the $189 million number. Now, the New York Insurance Department's current disregard of its own general counsel's opinion is entitled to no deference." I'll cite sort of classic language from Skidmore versus Swift, which is a United States Supreme Court case on the subject of deference to administrative agencies, and that's 323 U.S. 134 at page 140: "An agency's rulings, interpretations and opinions, while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance." But it's sort of worse than that here, your Honor, because what they're saying is that the guidance

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Petitioners-Steinberg That's what they underline, "the speed limit is a test." They're saying no, no, no, you're wrong on this. Going back to the other page -- just pull it out. Don't read the reference anymore. Here's what the Office of the General Counsel writes: "The evident purpose of the foregoing underscored language is to set the parameters and to simplify the computations used in declaring a shareholder dividend, based upon a statutory statement required to be filed under the Insurance Law and recognized by the legislature, bearing in find that earned surplus is a component of the unassigned funds (surplus), which in turn is a component of surplus to policyholders. "One cannot attempt to extrapolate language referring to surplus to policyholders without considering the component parts of surplus to policyholders. "Thus -- here's the holding -- "pursuant to section 41050, the source of dividends is limited to the earned surplus, which is a component of surplus to policyholders." Now, this goes back, again, to the first page, your Honor, that I pointed to you at the very beginning that says that, in the fourth paragraph: "The last

Petitioners-Steinberg on file with the Office of the General Counsel, upon which insurers and others rely, can be disregarded, and that is actually arbitrary and capricious. It is a substantial change from the prior practice. A decision -- I will cite from Knight versus Amilcon, a 68 N.Y. 2d 975, 1986 opinion: "A decision of an administrative agency who has neither adhered to its own prior precedents nor indicates its reason for reaching a different result on essentially the same facts is arbitrary and capricious." Now, it's not just the case that we're arguing this because this is some obscure fact. MBIA's own filings repeat and identify that they agree and are filed in accordance with the Office of the General Counsel guidance. Let me have slide 6. I have taken these items from -- this is the MBIA, Inc. Q-3 2008 10-Q, of course, filed with the United States Securities and Exchange Commission. "In the 10-Q from Q-3 2008 they disclose to the public as of September 30, 2008 MBIA Corp.'s dividend capacity under Insurance Law was approximately $189 million." Again, in the 10-K, the annual report for 2008: "As of December 31, 2008, MBIA Corp.'s dividend

5 (Pages 1473 to 1476) BARBARA STROH, CSR, CRR, CMR

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Petitioners-Steinberg capacity under Insurance Law was approximately $1 million." Finally, the MBIA Insurance 2008 annual statement, which, as I told your Honor, got filed just a week after the transformation transaction was approved: "In accordance with (3) above on the amount of dividends that can be paid in a 12-month period, MBIA Corp. has 1.1 million of dividend capacity at December 31, 2008." If you are looking to MBIA, like the Office of General Counsel opinion, it looks to what is the last statement on file, not some other number. Now, what did respondents say to get around the fact that MBIA Insurance's dividend capacity, as of its last statement, was, at most, $189 million at the time of the transformation? You'd better have some pretty good evidence. Let's put up slide 7. So I've sort of catalogued our evidence, and I'm cataloguing the NYID's evidence. We have an Office of General Counsel opinion, we have the MBIA's 2008 Q3 10-Q, 2008 10-K, the annual statement filed with the New York Insurance Department. We've got an e-mail from Ken Gingrass which I'm going to come back to. I mentioned it in my

Petitioners-Steinberg MR. STEINBERG: Please, I'll get to this. MR. HOLGADO: These were actually questions for Mr. Klein at Mr. Serio's deposition. THE COURT: Let's hear what he has to say. MR. STEINBERG: Thank you, your Honor. Thank you, your Honor. I'm just pointing out -- you see the document control number on the bottom? They're sponsoring it. It's MBIA NYS EXP 631A. That's not A for-MR. HOLGADO: It's -MR. STEINBERG: I has an A, it's an expert production, whatever. It's not coming from the New York Insurance Department. It wasn't produced by them for reasons I'm going to get into in a moment. It is an incomplete document. There are mistakes in it. There are unexplained -- I won't call them alterations. I will call them discrepancies. It is contradictory, it is unsigned, it is ineffective, and it contradicts the exam report on file for the National Continental Insurance Company. I'm going to now walk through and show you every single one of those failings. MR. KASOWITZ: If I might, your Honor, the document didn't come from our files. It came from the

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Petitioners-Steinberg presentation before on earned surplus. I think it will fit better with the story, and I continue, but what is it that they have on the other side of this? They have, your Honor, an exhibit that they showed to your Honor that -- the state did -- was called MRX 907, and an MBIA document. Now, MRX 907, let's go to the next slide, slide no. 8, please. This was a document related to Progressive and the National Continental Insurance Company that was shown to you. There are a bunch of problems associated with this document, your Honor. I have listed them there, and I'm going to walk through them. It has never been authenticated. It was a violation of confidentiality for, apparently, MBIA to have it. This is a document that comes up from MBIA. MR. HOLGADO: I'm going to object specifically to that assertion. I'd like to know the foundation for that. MR. STEINBERG: I'm going to get there. This comes from MBIA's files. We're going to walk through all of this. MR. HOLGADO: Again, this is not true. This was used at a deposition of Mr. Serio by an MBIA questioner, but it does not come from MBIA's files.

Petitioners-Steinberg Insurance Department, and I guess the only point that I would make about it is, if this was such a -- I'm presuming that the banks attended this deposition and, presumably, if they did attend this deposition, and if there were all of these purported defects with respect to this document, I'm quite confident -- I wasn't at the deposition, but I'm quite confident that all of these purported defects and failings were raised as of the time of the deposition as objections and the like, so. MR. STEINBERG: We will get to that. THE COURT: Let him finish his comment. MR. STEINBERG: Thank you your Honor. MR. KASOWITZ: I'll direct my comments to the court. I think counsel should as well. So if there are -- I guess our position would be that if there are places in the record at the deposition where all of these purported issues were raised, I think that that's probably the right way to do it. THE COURT: Excuse me. All right, again, you will have an opportunity to discuss this further. I'll listen to what you said. If you're going to make an objection, I'd rather you just stand up and say objection, rather than start

6 (Pages 1477 to 1480) BARBARA STROH, CSR, CRR, CMR

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Petitioners-Steinberg talking. It's very hard for the record, which they're trying very hard to make. MR. HOLGADO: Yes, your Honor. THE COURT: I just need you to do that. MR. KASOWITZ: It's fine, your Honor. They said it was a document from our files. It wasn't from our files. It was a document that was produced from the Insurance Department with respect to this expert, so that's just misleading to say it's from our files. We'll deal with it. MR. HOLGADO: In addition, it's a violation of confidentiality. The demonstrative has a question mark. I'm curious what the foundation is. THE COURT: Why don't we hear what he has to say, and then we can deal with it, okay? MR. STEINBERG: Thank you, your Honor. Let's start with the most basic fact. They say it's been authenticated. In fact, the only person that was shown this document was former Superintendent Serio, who was shown this at his deposition, and he did not recognize this. This is slide 9. "Have you seen this document or any part of it before today? "Answer: I can't recall that.

Petitioners-Steinberg provisions where the application here was produced and afforded confidential treatment, right, this application was confidential. So, too, 1505C. Now, we have cited from 1504. That's an application under 1505C, but 1504C is the provision of the New York Insurance Law that says that describes the confidentiality. The reason why I have the question mark is because there's an exception to it, but we have not seen it. It's superintendent -- the New York Insurance Law 1504C says: "The superintendent shall keep the contents of each report made pursuant to this article and any information obtained in connection therewith confidential and shall not make the same public." Now, there is an exception here, your Honor. It is you can't do it "except without the prior consent of the controlled insurer, to which it pertains unless the superintendent" -- you could do it "under consent or unless the superintendent, after notice and an opportunity to be heard, shall determine that the interests of policyholders, shareholders or the public will be served by the publication thereof." The reason why I have the question mark is I'm waiting to see the order. I'm waiting to see the
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Petitioners-Steinberg "Question: Does this document refresh your recollection that while you were superintendent of insurance of the State of New York, the National Continental Insurance Company made an application to the department for approval of an extraordinary dividend and for approval of a stock redemption at that time same time? "Answer: It does not." Now, Mr. Holgado on May 22, 2012, at page 901 of the transcript, told your Honor that Mr. Serio himself approved the transaction. Let's put up exhibit 907. Let's flip to it much let's flip to the very last page of it because we're going to be spending a little bit of time on it. This is an unsigned approval letter that doesn't have Mr. Serio's name. It has someone named Steve Wade. It is unsigned. I will come back to that. Now, how does this document get here? This is my question of confidentiality. Let's go to slide 10, please. They are saying, you heard MBIA counsel saying it came from the files of the New York Insurance Department. Well, your Honor will recall that under Article 15 of the New York insurance laws one of the

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Petitioners-Steinberg consent of the National Progressive Northeastern Insurance Company or the National Continental Insurance Company that would allow publication of this document. Now, of course, this, again, raises something we've been battling in this case a lot. It's what we call the sword-shield problem, where some things, they give us, and some things they don't, and it's selective. But let's go to slide 11 because there are some inconsistencies in this document itself. Now, let's actually put up the document. Let's go back to MRX 907, and this is a document that is dated November 14, 2001, your Honor. This is a document dated November 14, 2001. It has a notation around the side. Let's highlight that. "SW/EC." There's an "11/26/01" notation. Then there's a notation which I think says "received 11/16/01." I can sort of guess, but I don't know, that the "SW" is Steve Wade to whom this is provided. And he indicates or makes a notation on 11/26/01, but there's another notation on 11/16/01. But what's interesting in my mind, your Honor, is that part of this document at page 6/3/22 -- so it's about the fourth page of this document, you see in the

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Petitioners-Steinberg corner -- let's blow it up a little bit more, and let's yellow that. That says "SDP 11/6/01." I don't know who SDP" is. I don't know -- you know, maybe they missed the 6. Maybe it's a 4. MR. HOLGADO: Maybe it's a 10. MR. STEINBERG: Exactly. MR. HOLGADO: Maybe it's a 16. MR. STEINBERG: Maybe it's a lot of things. But we don't know. So, now, what is also interesting about the letter -- let's go to the second page of it. It describes what is contained in the letter, and that's in the very bottom paragraph, I guess in this case the penultimate one: "Information supporting this request for approval of extraordinary dividend and return of capital is attached annual pro forma financial statements showing the effect of the dividend and return of capital and NCIC's and PNEIC's 2000 annual statements and the second quarter 2001 statutory statements." As to the romanette 2 (ii) documents, those are not here. Those are not here. They did not provide, as part of MRX 907, those documents, haven't
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Petitioners-Steinberg what comes out of this -- because I'm coming back to it --you see the earned surplus for quarter 3 '08 on the right-hand side middle of the page? Actual unassigned funds? It seems to get to $8 million. Now, if you look -- and a now it says, of course, earned surplus for quarter 3 is 1 million and 77, but that isn't really quarter 3 because if you look at the projected numbers, that looks to come from that. (Continued on next page) (End of take 2)

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Petitioners-Steinberg seen them, not there. So, therefore, not complete. Moreover, the pro forma financial statements showing the effect of the dividend and return of capital -- let us go to the fourth page of this document. This is a document that Mr. Holgado showed you. This is a pro forma statutory balance sheet. It has actual results of 6/30/01. You see that header there? It has a projected 12/31 number, and I want to focus on, this is as of June 30. Now, if you turn to the next page, again, sort of same thing, a pro forma sheet, actual results as of 6/30 projected as of 12/31. That is -- this one has that which I don't understand the "11/6/01 SDP" in the corner. Don't know. Unexplained. Now, what's interesting to me is actually that the next page, your Honor, has actual results for 9/30/01. That is not one of the listings of what this document was to contain in the second page. So I just don't know where this document came from , and this one is -- now, you will recall that Mr. Holgado talked about how you were looking at the 6/30 results versus the 12/30 results. I'm going to talk about it in a minute, but, in fact, there were apparently 9/30/01 results, and

PROCEEDINGS - STEINBERG T3 MR. STEINBERG: I am just, I am sort of perplexed by this. What we do have, is they say the earned surplus, as of 12/31, would be over eight million dollars. The actual unassigned funds as of 9/30 would be $7 million. This is a bit of a mystery, your Honor. THE COURT: Can I ask you, when did you first see this document? MR. STEINBERG: We saw it at the Serio deposition. THE COURT: When was that? MR. STEINBERG: The date of that would have been last July. And, your Honor, they have never used it for this purpose until this trial. So, you will get your chance. Please. THE COURT: I asked a question. He answered it. You have something to say, say it later. You can't call out answers. MR. STEINBERG: So, now, let me sort of, they wanted to use this document to contradict the New York office of, the Insurance Department, Office of General Counsel's opinion on when you can -- once the when is the measurement date, because Mr. Holgado said look, they didn't have enough money, they paid it any way because they had these projections, look, this is all swell.

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PROCEEDINGS - STEINBERG I wanted to show your Honor the $7 million number because, and let me, sorry, let me find this for a moment. I am handing out to counsel a document that we have marked as Exhibit 1271, which is the report on examination of the National Continental Insurance Company. If I may hand it up to your Honor? (Handed). MR. STEINBERG: Now this, your Honor, is Exhibit 1271, which we will put up as slide 12. This is the report where the Insurance Department goes through and identifies -- go back please -- identifies, does an exam and sort of identifies what happened over the period and evaluates dividends, among other things that it looks at. Now, what if you -- go back to the very first page. I am sorry, let's go back to the mystery exhibit of 907, the mystery exhibit of 907. Let's blowup the first page that shows what the request is for. They are asking for an extraordinary dividend, you see it in the very first line, of up to $8 million. Okay. That's what they want, the extraordinary dividend of up to $8 million. Now, let us put up the exam report that has been marked as PX 1271, and let's go to the page. Let's put it up as a slide. I will go to the slide. Let's do that.

PROCEEDINGS - STEINBERG Now let Lieutenant me go full circle. We go back to 907, and we go back to the page that, I don't know from whence it came, keep going, it's the, it's not the pro forma, it's this page. Blow up the right hand side of the page. They have actual unassigned funds which is being equivalent to earned surplus of seven million dollars. So, let's assume that this is actually as genuine as the dollar bill in my pocket. This is, would be in excess of the $8 million of earned surplus. That would work. I am not vouching for this document. I have no idea from whence it came, but I want to go back to one other point. That letter is unsigned. The approval letter which has typos in it, let's go back, let me go to slide 13. It has a typo. "The extraordinary -- " blank -"of 8 million", it is inconsistent with the record, the report and it is unsigned. Unsigned means something in this context, your Honor. The Insurance Law Section 3002, which we have talked about before with you, "whenever there is any provision of this chapter, the Superintendent is authorized to grant any approval, authorization or permission or to make any other order, such order shall not be effective

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PROCEEDINGS - STEINBERG Now, let's go to the next one, Roger. This is slide 12. So, I took from the letter payment of extraordinary difference -- sorry. I took this from -- let me go back. I just want to make sure you are following completely, and I just lost you. The last page of Exhibit 907 is this unsigned approval letter. Let us go back to that. Let's blow this up. This letter refers to your letter of November 14th, 2001, where you requested that the insurance company be permitted to pay an extraordinary dividend in the amount of $8 million to its parent. Right now, we don't -- if you look at the next paragraph -- we don't object to the redemption of shares and payment of an extraordinary, extraordinary blank -- it's, there is a little bit of a typo there, of eight million dollars. Now, what does the exam report say about this? Your Honor, let's go to the exam report 1271, slide 12. The exam report, your Honor says, there was an extraordinary dividend in 2001 of $6 million. $6 million. Your Honor, not $8 million -- $6 million. And that, it's quizzical to me too, your Honor, this unsigned letter says $8 million, the exam report, 1271, says $6 million.

PROCEEDINGS - STEINBERG unless made in writing and signed." Signed by the Superintendent or, by his authority. We don't have a signed version of this, your Honor. We just don't, and it's inconsistent with the file. If there was any doubt "regulation one and order is an official act of the Superintendent of particular application, including approval and like official acts having legal consequences." That letter has legal consequences. It is what is allowing the dividend to occur. So, this is a long winded way, and I appreciate your Honor's patience, of saying we have no idea how to solve the mystery of that document. But, whatever it is, it doesn't help them. Now, I want to turn, your Honor, and I am going to be brief on this point, to the measurement date does not apply. This is a hypothetical point. What happens, how do you make the measurement date not apply here? And how the Respondents want to make the measurement date not apply is to say simultaneity. So, even if we throw out the Office of the General Counsel's measurement date, MBIA Insurance did not have 1.147 billion earned surplus before the transformation. And, you have heard a lot about simultaneity over the past weeks, and most of it focused on language. We

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PROCEEDINGS - STEINBERG point out all the language, all the evidence that supports that the transactions were sequenced. Respondent pointed to a couple of instances where other language was used and they argue the application showed it was simultaneous. We showed that the argument that the approval letter -- I know your Honor is going to read this -- I am not going to go through it. It's just, I am not going to spend my time here with your Honor focusing on words of sequence, nor am I going to discuss, spend my time pointing out that Jane Boisseau, has double or triple hearsay problems on her quote unquote, of her understanding on the Department's view of simultaneity. I invite your Honor to look at that affidavit for that. I am not going to spend time here showing how Respondents have avoided language from the application that supports our points, but I am confident the Court is going to go back and look at all of this. Instead, I am going to focus on something where I think I can help the Court in your analysis. I want to focus on some numbers. Let's put up slide 14. Now, what I have done is, there was an earlier e-mail and this is -- this is good, it's in the morning. It's not in the late afternoon, and copy has been made.

PROCEEDINGS - STEINBERG If you look on this exhibit, I have highlighted the bottom line, the proverbial bottom line that says "earned surplus after each transaction". And, in the upper left hand part, there is a beginning balance, and then there are three transactions, the dividend of stock, a reinsurance agreement and a dividend of share redemption. What happened first was when, in the, if you did the MBIA Illinois dividend as the first transaction, you see up at the top it says 185. That 185, because it's being dividended up, out of earned surplus, taken away, you have to deduct for that. Well, if you deduct for that, you get a negative 12. Again, I am focusing on the methodology, not the numbers. It came up in the very first instance with a negative. Okay. But then they said, oh, we have this reinsurance agreement and in the reinsurance agreement there is a release of contingency reserves, which I will come back to. There is a seeding commission of $492 million and look, in the next line, you add those two together and you get 14 -one billion four hundred sixty eight thousand in the third step. But then, I am going to dividend out 1.124 billion, and that's going to leave me $324 million of remaining

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PROCEEDINGS - STEINBERG What I am focusing you on, there is a December 15th, 2008 e-mail from Kenneth Gingriss at the New York Insurance Department, who is looking at pro formas that describe this transaction. This is from the administrative record. It's a 242-20, the 242-20, and this is the e-mail back I will start with. I will start with the financial statement first because I want to sort of get to that. If you look, this is an MBIA Corporation statutory basis statement of admitted assets, liability, and capital and surplus, as of September 30th, 2008. So, they take the September 30th numbers and then they perform a transformation analysis based on it. Now, I am going to tell you from the outset that this analysis, the numbers in it prove to be wrong. But, I am not relying on the numbers for that. I am relying on the numbers for a different point. They came back on the next day and said oh, we left out some numbers. It actually turns positive. Everything is good, everything is swell. What I am relying on is the methodology that the Department looked at to say up to -- to follow the earned surplus numbers because it is important. Now, the New York Insurance Department focused on earned surplus after each of the component transactions.

PROCEEDINGS - STEINBERG earned surplus. Okay. It's, there were three different steps and they followed the earned surplus in each. So, the starting earned surplus was greater than zero, the ending earned surplus was plus 324 million. What does The Department say? "Dear Ms. Tam and Ms. Boisseau, this proposal does not seem to work legally. MBIA Insurance does not have sufficient earned surplus to dividend the stock of MBIA Illinois, as MBIA Insurance is left with an earned surplus of negative 12 after the dividend." These sequences matter, your Honor. It was illegal. I told you the next day they came back and came up with a different set of numbers. That is not my point. Now, this conclusion is sort of not surprising and I hope puts to rest the view that we can have all of these simultaneous transactions and mortgage transaction where everyone is sitting around the table, release liens, handing out money, do this, do that. That's not the point, your Honor. Each component of a mortgage transaction is lawful on its own. But here, the use of simultaneity, a mushing this together, looking at the start and end only, would be used to avoid the legal requirements of Section 4105. Now, your Honor, I have some bad news. The bad

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PROCEEDINGS - STEINBERG news is, I have to talk about accounting, and it is bad news indeed, but it's important bad news. The Respondents in this case have never explained how supposedly simultaneous transactions created earned surplus. Simultaneity is just their answer to when it was created, but not how. And, your Honor, the testimony -- let's put up slide 15 of MBIA's own statutory accounting expert, Edward Buttner, establishes the reinsurance transaction does not generate enough earned surplus to finance the dividend. I am going the read from paragraph 90 of Mr. Buttner's affidavit and again, apologies in advance. I will get to the punch line. But, he talks about, under Section 6903, and it's not, I just want to read it in the context so that we are all going through this painful exercise together. 6903 and SSAP 60, which are the statute and standard accounting practice here, and I am probably blowing SSAP, but require financial guarantee insurers to establish and maintain a contingency reserve to protect policyholders against loss during periods of extreme economic contraction. We talked about the contingency reserve before. EG, a recession that effects housing credit, employment. That contingency reserve is a statutory accounting requirement only. It's not something under GAAP. Fine,

PROCEEDINGS - STEINBERG "unlike other reserves proscribed by SSAP number 60, changes in the contingency reserve reported directly as increases or decreases to unassigned surplus and therefore, are not included in the determination of earned surplus." "Do see that? "Answer: Yes, sir. "Question: That's correct? "Yes, sir. "Question: I am confused, so hopefully you can explain something to me. "Answer: That's dangerous. "Question: Do you understand, I think in connection with the reinsurance transaction, as part of the transformation, MBIA Insurance released some of its contingency reserves, right? "Answer: Yes, sir. In the reinsurance transaction as the liabilities were transferred, the contingency reserves, so to speak, was transferred as well. "Question: Was, was released? "Answer: Right." Go up will little bit. "My understanding had been that the release of those contingency reserves, in part, resulted in the increase of MBIA Insurance's earned surplus; is that correct?"

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PROCEEDINGS - STEINBERG GAAP is different, but the insurance laws have specific definitions that are more stringent than GAAP. The contingency reserve is a formula based reserve and it talks about where you get it, the contingency reserve, and reported on their financial statement. We have chatted about that. Now, we are getting to the not so exciting punch line, but it's exciting for me, your Honor. Unlike other reserves proscribed by SSAP number 60, changes in the contingency reserve liability are reported directly as increases or decreases unassigned surplus and are therefore, therefore, are not included in the determination of earned surplus. Now, we followed up with Mr. Buttner at his deposition to ask about this issue, and he confirmed that the release of contingency reserves through the reinsurance transaction would not effect MBIA's insurance earned surplus. Let us put up pages 296 and 297 of Mr. Buttner's, Mr. Buttner's deposition. I will grab it, so I can read along with your Honor. Now, the type is getting smaller and I am getting older. If we look at page 29 at the very top, 295 please. Okay, now at the end of paragraph 90, that's what we have been talking about, last sentence on page 35 says,

PROCEEDINGS - STEINBERG Here is his response. "I don't believe it resulted in an increase in their earned surplus because contingency reserve, by its definition, is a direct charge to earnings. It's not a direct, it doesn't run through the income statement -- " i.e. earned -- "which, that was my addition to the transcript, "it doesn't run through the income statement which is, as I understand it, and as I understand as I read New York statute, the New York statute as it defines earned surplus, it defines it as a number that would be coming out of the statement of net income and contingency reserves don't effect the statement of net income. "So, it is your understanding as part of the, that one of the results of the reinsurance transaction was that MBIA Insurance's earned surplus increased? "Answer: Well, it did increase. And what, as an accounting matter, well, it did increase." Now, I want to go to, your Honor, let's go to him, I am sorry, it is accounting, but let us go now to slide 16 and let's discuss its impact. So, he said contingency reserves don't increase earned surplus. That's their expert testimony. It is clear both at his deposition and from his expert report. This is one of the pro formas. This is actually, this is from PS 242-44. This is the pro forma that was

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PROCEEDINGS - STEINBERG created on the last -- this is the last pro forma in this transaction and it's from the administrative record. Now, if you look, your Honor, at the reinsurance agreement column, to the left of it unassigned surplus. New Co. contingency reserve one billion three hundred fifty-seven thousand. Okay. That's the release of contingency reserves, and then there is a ceding commission of $497,000,000. That is the ceding commission that got paid back to MBIA Insurance company as reimbursement for their efforts in writing the insurance policies in the first place. The total of those listed in the earned surplus item here essential $1,855,000,000. That is the total of 1357 plus 497 plus the one that is to the left of the 1855. Okay. In other words, they included that to get to the 1,855,000,000 contingency reserve that their accountant both put in his expert report and put in the, and testified to at his deposition was not possible. That number is not a basis for earned surplus and that's what he has testified to. The 497 million, we can debate that again on an accounting matter, when it was earned, whatever, but whatever that is, whatever that is, we know that 497 million is less than the dividend that was 1.147 billion here.

PROCEEDINGS - STEINBERG Department did. Petitioners have asked in this case a very direct question -- what if MBIA had hired Black Rock? We did not ask, although the Respondents both pretended there was a different question asked. They all said what if the Department hired Black Rock. That wasn't the question. Why didn't the Department use third parties to analyze this complex data? It can't be that there was no time, because Black Rock said it could do it with plenty of time. But instead, both the Department and MBIA have come to a new reason why it would have been inappropriate to engage the most prominent third-party analyst in and the one that the Department itself originally put forward, Black Rock. This is, of course, back peddling, but what's worse, it's contrary to the evidence and it's contrary to something else -- common sense. You both heard Mr. Holgado and Mr. Kasowitz attacking Black Rock as being conflicted because they supposedly were too closely aligned with the policyholder Petitioners here. Right. I mean, and the only thing that Black Rock was close to being, it was too close to, was too close to being

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PROCEEDINGS - STEINBERG That's what we know. Now, there is just not enough earned surplus. And, without, without that, we can talk about simultaneity, we can talk about all of that, but this is from their accounting expert, your Honor and this MBIA's accounting expert. Respondents have never explained how they could create earned surplus from the transformation. In fact, and I noted this at the beginning, Mr. Kasowitz pointed out from our brief, where we called it legal alchemy. Mr. Kasowitz is right, I need to change it. It's actually illegal alchemy. They made something out of nothing and it wasn't right. Your Honor, I will turn to one other topic here this morning. I am going to turn to the topic of Black Rock. I hope to be brief about this. I have some things to say, but I will endeavor to be brief. And, I will admit that I was sort of surprised by the attacks on Black Rock. Both the NYID and MBIA expressed nothing short of moral indignation that we could not, that we did not discuss with the Court or bring to the Court's attention conflicts of interest. I was taken aback by that. I really was surprised. I guess I was not as surprised by MBIA's taking that position, but I was sort of more surprised that the

PROCEEDINGS - STEINBERG right. We showed you the numbers. We showed, in their $14 billion, and based on case losses on just 25 percent of their exposure, we showed you how Lehman's based case losses on the same deals were worse. So, if you are really trying hard to close your eyes to some eye popping losses, I guess you better come up with a real good excuse why we should disqualify Black Rock. We heard Black Rock was conflicted. I guess Lehman was conflicted and Raymond James and Perella Weinberg couldn't be used, so everybody was conflicted, your Honor, everybody except MBIA. Now, let's just do address and quickly dispose of a factual point. The NYID obviously knew about a supposed conflict and yet, they still suggested using Black Rock for a third-party analysis. Let's put up slide two. This is just, I want to point this out, Black Rock buys Merrill Lynch, Merrill Lynch had an interest in Black Rock. That was a deal, was announced on -THE COURT: Bank of America. MR. STEINBERG: Bank of America buys Merrill Lynch. Merrill Lynch had the interest in Black Rock, September 15, 2008. Public deal, not secret, nothing. Everybody knows about it. Mr. Finer tells MBIA in November, roughly two

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PROCEEDINGS - STEINBERG months later, that you know, we may want to have a third-party analysis. Others have used Black Rock with some success and it would assist us in our fair and equitable determination. It's hardly the case, your Honor, that the New York Insurance Department felt that this was such a grave conflict that Mr. Finer wouldn't have put this forward two months after that deal was announced. But, that's okay, we will get to that. Now, MBIA claims that these, that Black Rock is riddled with conflicts of interest in this situation. But, I think, before we get to the issue of whether there were real conflicts, let's think about this really hard. Let's ask the question, were there, in fact, conflicts that prevented Black Rock's exclusions from analyzing this? (Continued on next page.)

Petitioners-Steinberg in discussions with the New York Insurance Department. It is horrible that I didn't think it was compelling enough to raise any conflicts. I'm sorry about that. I thought that it was sufficient that they were even arguably aligned with policyholders. But, you know, including policyholders in this dialog actually seems like a pretty good idea. You know what? It's such a good idea, that under the New York Insurance Law, it's part of that law. You heard argument about how the department can delegate out its regulatory function. But you know what? The argument is actually wrong. Section 310 of the New York Insurance Law actually welcomes policyholders to scrutinize the financial condition of insurers on behalf of the department. Here is section 310(a)(1): "Whenever, pursuant to any provision of this chapter, the superintendent shall determine to examine the affairs of any insurer or other person, he shall make an order indicating the scope of the examination and may appoint as examiners one or more persons not employed by any insurer or interested in any insurer, except as a policyholder. You could appoint someone aligned with a policyholder to conduct the exam."

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Petitioners-Steinberg T4 Absolutely not. What was the supposed conflict? As I understood their argument, the supposed conflict was that a BlackRock affiliate, i.e., BlackRock Solutions -- BlackRock affiliate, not BlackRock Solutions, held client investments that might in turn be insured by MBIA. So let's think about it. So BlackRock, which invests on behalf of its clients trillions of dollars in assets, and among those assets invested for other clients may be policies insured by MBIA. So I thought about that conflict for a little bit and the moral outrage that we received, and here's what I came out with: Your Honor, how dare we suggest that a firm that might have an interest in protecting policyholders have a place at this table? Right? How dare we? It is galling. It must have been horrible, your Honor, that a firm somehow aligned with the interests of the policyholders, not the shareholders, would actually be able to participate in valuing the most highly volatile structured finance instruments that our clients paid insurance on. That is terrible. I guess I should have just left MBIA, the stockholder, to be the only participant

Petitioners-Steinberg No great surprise there, your Honor. They're the interested people. They're the people to be protected, not the stockholders. Not the stockholders. The policyholders. Now, not only is the exclusions of BlackRock, for conflict reasons, inconsistent with the department's primary duty, but it's also inconsistent with Insurance Law 310 itself. Now, Mr. Kasowitz has stated it would be difficult to think of a third-party consultant that has more conflicts of interest in this situation than BlackRock, and that's from May 24, 2012 at 11:22, lines 13 through 20. As this court is already aware from the other action pending before your Honor, BlackRock has shown itself to not be shy about confronting banks, including in the Article 77 case. I'm not going to dwell on it, but you know all about it. BlackRock and Pimco brought claims against banks, including B of A, on behalf of BlackRock's clients. BlackRock and Pimco brought claims because their clients wanted to assert claims. I want you to keep that in mind because it's sort of an important point in this case. In other

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Petitioners-Steinberg words, BlackRock and Pimco are being criticized because they have put their clients' interests, to whom they are fiduciaries, ahead of the interests of the stockholders. I think there's a lesson to be learned in there somewhere, and maybe we can find some insurance statutes that sort of bear on that issue. But I would say that, look. At the end of the day MBIA makes the assertion, as the shareholder, that they should have been the only one participating in it. And they actually had the guts to argue that someone who might have an interest aligned with the policyholders should be excluded from the process at the onset. And the chutzpa, to use Mr. Kasowitz's words, I guess what he meant is that Mr. Finer had some chutzpa to suggest that MBIA hire BlackRock to enable the department to make its fair and equitable determination. Maybe that's why the department never made that determination, but Mr. Giuffra will come back to that. MBIA's position on BlackRock is that the best modeling firm in the world should be excluded in favor of using the biased views of MBIA.

Petitioners-Steinberg So let us put up slide BR 4, and I won't read this -- I am going to read this, your Honor, actually. The GAO -- okay, yes, thank you. Mr. Paltrowitz' expert report, affidavit indicated that BlackRock Solutions had been hired by Ambac, CIFG and Syncora, all of the ones that were insolvent and on the verge of rehabilitation in late 2008 and 2009. On January 22, 2009 the Department of Insurance announced that they had approved various agreements to commute trouble credit default swaps and reinsure municipal bonds of CIFG. Where was BlackRock at the table there? BlackRock was at the table on behalf of the monolines, your Honor. The monolines. BlackRock Solutions -- I'll talk about it in a minute. When they want to talk about a black box, what that means is, among other things, BlackRock tries to give its best advice to everyone who asks, everyone who pays for it. That's why governments and central banks and the largest financial companies in the world trust BlackRock Solutions. Now, your Honor, if this is a convenient point to stop, I want to very quickly end, and then turn the
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Petitioners-Steinberg MBIA, who acknowledges that they have a fiduciary duty but has engineered this transaction which benefitted its shareholders, to the detriment of its policyholders, actually has the guts to come in and argue that someone who might protect policyholders should be excluded from the conversation. I have a different word from chutzpa for that. It's a shonda, and I will translate that for both the benefit of Mr. Giuffra and Mr. Holgado, but a shonda is a shame. It is a deep abiding shame, and it is a shonda for MBIA to argue such a thing. Now, of course, MBIA-THE COURT: The court reporters have told me that they're getting a whole new dictionary out of this case. MR. STEINBERG: And it's S-H-O-N-D-A. No, of course, MBIA would not be the first to raise the question of conflicts with BlackRock, and we would at least have expected that MBIA and the Attorney General's Office would at least give the complete picture of any conflicts and perhaps explain why BlackRock was perfectly acceptable for all the contemporaneous monoline restructurings that MBIA told you about and the department approved but now apparently is wildly conflicted.

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Petitioners-Steinberg table over, if that is acceptable to your Honor. THE COURT: Yes, so should we take a short break? MR. STEINBERG: A very short break right now, because I want to make this shorter, you know. THE COURT: All right, so we'll take a ten-minute break. MR. STEINBERG: Thank you, your Honor. (Short recess taken.) THE COURT: Okay, have you got anything more interesting to talk about? MR. STEINBERG: Yes, exactly. After accounting earned surplus and solvency, anything could be better; I agree with your Honor. But I am going to talk to you about black boxes for a minute, and MBIA simply proclaims that BlackRock could not have been relevant when Mr. Buchmiller was doing his review because Mr. Buchmiller was only interested in MBIA's model because he could witness every calculation firsthand. But MBIA's own model makes use of third-party software such as Intex, which is itself not fully transparent. Mr. Buchmiller testified that he called Mr. Paltrowitz to ask questions about structured finance

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Petitioners-Steinberg modeling in the course of his MBIA review. So the notion that blackRock's methodology made its views irrelevant is contrary to the evidence, and that's from Mr. Buchmiller's second deposition at pages 194 to 196. In any event, page 9 of the now unredacted Buchmiller and backdated memo says that loan level statistical models such as those of BlackRock are, quote, "probably better but more complex," end quote. This comment, of course, was redacted until last week. Now, MBIA argues that every other analysis of its likely losses, Lehman, FSI, BlackRock, were all unimportant because they are all black boxes. While BlackRock's RMBS model is a computerized model, it's not quite a black box. Petitioner gave respondents the outputs of the model. They could provide the input. They could do whatever they want. The fact is we gave them an opportunity to run BlackRock's models and test those conclusions. Their actual expert, James K. Finkel, managing director at Duff & Phelps, never did so, but we understand some of his assistants did. So while MBIA's expert purports to criticize

Petitioners-Steinberg I can see precisely how it works. I can see the pedals, I can see the chain, I can see the gears, I know how it works. No black box there. My car? A little bit more complicated. I can open the hood, I can see the parts, I know where the oil goes, I know where the gas goes, I know where the radiator fluid goes, I sort of know how it works. But it's gotten a little bit more complicated in recent years. But I still can trust it for propulsion. But, man, when I get on an airplane, I am putting my life in just God's hands because I cannot see how a jet engine works. I see a big turbine. I don't know how the fuel injections work, I don't know how they ignite it, how they run it. I know nothing. But that doesn't mean that the jet-propelled engine is any less safe because I can't see it and poke around with it before takeoff. Now, this basic common-sense observation is confirmed by the leading case from the Court of Appeals on the admissibility of expert evidence from proprietary methods. That is the People versus Wesley case, and in that case the Court of Appeals approved DNA testing using proprietary methods.

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Petitioners-Steinberg BlackRock's model, he personally never logged onto the system. He, likewise, declined to use his own model to validate MBIA's loss estimates or BlackRock's. Respondents also deposed Mr. Paltrowitz for eight hours, had every opportunity to ask Mr. Paltrowitz about anything to do with its model. He explained BlackRock's model as as transparent as its clients wish, and these clients are awfully sophisticated. BlackRock provides as much information as the clients want about the millions of computations that underlie its conclusions. Calling something a black box, your Honor, doesn't make it unreliable or irrelevant. It means that it's more complex than a simple XL chart, and people whose expertise is sought out to -- and a block box is a way of saying that it is proprietary information. In other words, that somebody spent millions and millions of dollars to invest in this system, not just run an XL chart. Just because something is not easily seen does not mean it's not valid or worthless. So let's be basic. I can look at a bicycle.

Petitioners-Giuffra "Despite," to quote the Court of Appeals in People v. Wesley, "little peer review of 'proprietary DNA testing methods,' the court held that DNA evidence is admissible because it was not the Court's function to determine that the evidence is true. That should be left to to trier of fact." Now, we live in a complicated world, but that complexity is what enables us to advance. We all won't understand every single thing, but somebody did, and someone could, and you could check it, and if you wanted to investigate it -- if they wanted to investigate the models, they could have run they will, they could have changed the inputs. But we're talking about complicated and, you know, highly-invested-in assets. By the way, the ultimate test under Frye is acceptability. BlackRock -- there is no one disputing that BlackRock's models, its analysis is the most highly valued in the world. If they had any valid criticism of the actual loss estimates that BlackRock produced, they would have offered them. They didn't because they can't. Thank you, your Honor. THE COURT: Thank you.

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Petitioners-Giuffra THE COURT: Mr. Giuffra. MR. GIUFFRA: Thank you very much, your Honor. I actually have an even more dull topic to talk about which is financial modeling. We actually drew straws, and I got financial modeling. It may be a function of the fact that I've been in the case a little longer, but I want to talk a little bit before lunch about the errors and some of the arguments that the other side has made with respect to the errors. The state on 5/22 at pages 851 and 852 said that, well, this deferred tax error -- that's the $1.4 billion error that MBIA has admitted to -- he said, well, it didn't affect any financial statements, only stress scenarios. But there were no actual financial statements for this error to affect because the transformation review was based on pro forma analyses of MBIA Insurance post transformation. It was based on what would happen in the future. Now, there was also a statement made that, well, this error was just in an extreme stress scenario, you know, just sort of a what-if thing. Let's put up slide 2. This is from Mr. Chaplin's affidavit. He's the CFO of MBIA. This error

Petitioners-Giuffra after the fact. Now, there really can be a serious argument that these errors were not material. Slide 4, which is the testimony of MBIA's own expert, Mr. Buttner -- I showed it to your Honor yesterday. I'll just go through it quickly. He agreed that it was a material error, an error that went as high as $1.4 billion. We also put up -- let's put up slide 5. Mr. Greenspan, he said clearly that this was a material error because it changed the extreme stress scenario materially and adversely affected policyholder surplus from positive to negative. Let's put up the next slide. Mr. Goldin said that the errors were material, and materially represented the financial position. Let's put up the next slide. Mr. Hershman, an accountant who was presented by us, said clearly this error had a material impact. One of the things the department tries to do in trying to minimize the importance of the extreme stress scenario is to say that, well, Mr. Buchmiller --Mr. Kasowitz and Mr. Holgado made this argument; Mr. Holgado on the 21st at 698 and Mr. Kasowitz on the 29th at 1179 and 1186, said that Mr. Buchmiller assigned no probability to this extreme stress scenario.

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Petitioners-Giuffra appears first in the October 30 presentation to the department. It appears in a December 3 presentation to the department. I showed your Honor yesterday how it's on the face of the application letter itself, a $1.2 billion error. It was part of the January 27 presentation to the department. And the error also affected the January 29 presentation to the department. This was not some error that was a minor error. It was something that was throughout the presentations and the applications that were being made by the department. It also, your Honor, affected the XL files that were given to the department and that underlie the extreme stress scenario. I talked a little bit yesterday about the fact that there is in case that says that the test for materiality is what a former government official thinks years after the fact would have changed his or her decision. The law on materiality is whether something would have a substantial likelihood, that information would be something important to consider. It's not to change my decision, particularly

Petitioners-Giuffra You would think that Mr. Buchmiller testified that there was zero probability of this extreme stress scenario occurring. Well, what happened, in fact, your Honor -let's put up Mr. Buchmiller's deposition, which is slide 9. The first question was -- this is his September 28, 2010 deposition at page 368: "Question: What did you mean by break-the-bank? "Answer: To produce a scenario that would give them a negative surplus or an inability to pay claims at any point in time." Next page -MR. HOLGADO: Could you just read the next question and answer, please, from the 368 to 369. MR. GIUFFRA: Fine. I'm happy to do so. "So the idea was to get a scenario that was highly unlikely to occur but see where the losses would stand, right? "Answer: I would not assign any probability to the break-the-bank scenario." Then -- this is the important point, your Honor. This wasn't entirely all before the court. "Question: Back in February 2009 did you do any analysis of the probability of either the extreme

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Petitioners-Giuffra stress case scenario occurring, the stress case scenario occurring, or the base case scenario occurring?" What did Mr. Buchmiller say? "Answer: No, I did not attempt to assign probability to those." So, essentially, your Honor, Mr. Buchmiller didn't do any probability waiting, so to say that Mr. Buchmiller did not do a probability waiting for extreme stress is not providing the court with the full picture. Now, respondents don't really explain why Mr. Buchmiller was focused on this extreme stress scenario. They would have the court think it was some irrelevancy that he thought maybe that MBIA should run, and we ran for the court -- I'm not going to put it up again -the MBIA internal e-mails where they were talking about how important Mr. Buchmiller's work was to transformation and referenced stress scenarios that needed to be run. Now, the documents that are before the court make quite clear that Mr. Buchmiller was focused on MBIA Insurance's surplus under extreme stress. Let's turn to slide 12. This is one of the e-mails we put before the court previously, January 30,

Petitioners-Giuffra Obviously, sitting here today, we can never guestimate, well, how would the department have considered that information, and would the decision have been different? That's not the test, though your Honor. We have a decision by the department that was based on materially erroneous information, and no one has cited in this courtroom any case where a court has said -sort of given the task and said I'm not going to anull the decision based on materially erroneous information. We think, your Honor, that, as a matter of law, if it was materially erroneous information that was relied upon by the department, the court must anull the decision. But let's turn to another document, which is 13. This is Mr. Buchmiller's final memorandum, backdated memorandum. He basically says on page 29: "But because I am tracing the extreme loss scenario, these figures do not tie to their statutory balance sheet, which is, and is supposed to be, the expected case." The key words are, quote: "The worse-case scenario is more appropriately your concern regarding transformation, whereas the expected-case is the examination's focus."
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Petitioners-Giuffra 2009. He's reporting up to the senior staff of the department. He's just received on the 29th the extreme stress scenario that had the errors in it, and what is Mr. Buchmiller telling his supervisors at 1037 in the morning we raised the question when I first talked about this. Didn't really have much time to analyze that extreme stress scenario and all the back-up for it such as it was, but he made the point to the senior folks at the department that, quote: "They actually survive in one of the four resulting extreme scenario outcomes, with surplus falling to 300 to 350." Later in the same document he says: "Given that, they have reasonably demonstrated Corp./oldCo. (New York) can survive with a reasonable expectation of viability." Mr. Buchmiller clearly thought this was important information that he should communicate to senior decisionmakers in the department. It was not some irrelevancy. Obviously, if the correct information were present, he would have had to say that they didn't survive in any of the extreme stress scenarios. In fact, the policyholder surplus went negative by the end of 2009.

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Petitioners-Giuffra Of course, your Honor, this transformation review was being done in the middle of the worst financial crisis since the Great Depression. There was undeniably massive uncertainty. So Mr. Buchmiller in a memo he wrote at the request of a lawyer in either March or April is saying that the worst-case scenario is appropriately our concern regarding transformation. Now, let's turn to slide 14. This is something that's also in the backdated memo. He makes the point, the same point that was made in the January 30 e-mail to his senior colleagues at the department, and this is at pages 31 and 32 of the backdated memo. And he says, quote: "MBIA New York actually survives in one of the four resulting extreme scenario outcomes with surplus falling to 300 to $350 million." Again, if the correct information had been approached, that would be a different statement that would be in that backdated memo. But then going further down, Mr. Buchmiller says, quote: "Given that" -- and that's, presumably, all that he's talking about, and if you actually read it -- I probably went a little too fast. He says: "As the break-the-bank or extreme stress test requires solving reserve model backwards,

17 (Pages 1521 to 1524) BARBARA STROH, CSR, CRR, CMR

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Petitioners-Giuffra iterating to a solution," Mr. Buchmiller says "300 million is close enough to the statutory minimum surplus of $65 million to be an acceptable break-the-bank scenario." (Continued on next page) (End of take 4)

PROCEEDINGS - GIUFFRA backdated memo, and he did so repeatedly. Now, the Respondents try to move the goal post here to create a test that they think they can pass -- that's positive statutory capital instead of positive policyholder surplus. Now, the State, in support of that position and let's put up slide 18. They cite the fact that the Department only acted because there would be sufficient statutory capital to meet the letter and spirit of the Insurance Law. They focused on statutory capital, according to Mr. Holgado, as being the touchstone of solvency. Let's turn to the next line. What is statutory capital? Statutory capital is policyholders surplus, plus contingency reserves. What the Department does, they focus on the press release, your Honor. I think one of the telling things about this case is that the sentence of relying on the press release, not on a certified administrative record, as opposed to what is actually the approval letter -- the approval letter, and your Honor, the only place where even the word comes up under the dividend, talks about sufficient surplus. Doesn't talk about statutory capital. Statutory capital is something that's in the press release.

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PROCEEDINGS - GIUFFRA T5 MR. GIUFFRA: Then, he goes on to say, given that they had reasonably demonstrated all Co. New York can survive a significant and continuing bear market with a reasonable expectation of liability even under very, if not, extremely distressed conditions. That's page 284 of the Bate stamp numbers. Slide 15. This is right on, this is page 33 of the memo, your Honor. This is something that, your Honor, were the unredactions of. Mr. Buchmiller is saying, quote, although personally more pessimistic about Federal regulatory and legislative responses to the current financial panic and economic downturn, I have, for my purpose here, accepted MBIA's assumptions above, as they are closer to the February 17th consensus than mine again." What we know, not what we fear. Then, the critical sentence, "however, when a choice was available, I opted for the most pessimistic scenario, for example, Lehman stress case for contingency reserves and MBIA's stress and extreme cases. Extreme stress clearly was the most pessimistic analysis that MBIA showed to Mr. Buchmiller, and he talked about it in memos to his superiors and also, in his final
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PROCEEDINGS - GIUFFRA MR.HOLGADO: Could we just, if your Honor, if we could make clear the approval letter makes clear that is the actual language of the statute of 4105(a) and so that's why it's tracking that language as well. MR. GIUFFRA: Absolutely. In fact, your Honor, that's a very good point. This is about the statutes that needed to be complied with here -- statutes that were put in place to protect policyholders from stockholders of holding companies that owned insurance companies. 4105 is one of the multiple provisions in the Insurance Law intended to protect policyholders, whether they be banks, property owners or ordinary folks from insurance companies. That's why this provision is important. That's why Mr. Steinberg talked about it so much this morning, and it uses the word "surplus". Now, let's put up slide 20. We talked to Mr. Buchmiller and we asked him, this is his February 2nd, 2012 deposition, pages 26 and 27. "Question: But, would it be fair to say again, in connection with your financial review of MBIA, you pay close attention to the policyholder surplus projections that were made by MBIA in connection with the various stress scenarios that were provided to you?

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PROCEEDINGS - GIUFFRA "Answer: Generally yes, I did." MR.HOLGADO: Page? MR. GIUFFRA: Pages 26 and 27. Why was that? Well, again, it is a threshold and the question your Honor, the next question is, this is Mr. Buchmiller's words and certainly goes clearly to the question of materiality. "Question: When you say "threshold", what did you mean specifically? "Answer: Well, if it falls below 65 million, best I recall, the statute allows the Department or the Superintendent to instruct the insurer to stop writing business and repair its surplus. "Similarly, if it's below zero, surplus is negative. They would also want to plan an action to restore surplus to its proper level, minimal level, I should say." So, the notion, your Honor, that surplus is somehow not important and that statutory capital is the key financial metric, is belied by what Mr. Buchmiller said at his deposition, it's belied by the approval letter, it's belied by the rules governing Financial Guarantee Insurance insurers, it's belied by 4105 and, your Honor, essentially, to sustain this decision, your Honor would have to find that error, which was $1.4 billion, and took basically the

PROCEEDINGS - GIUFFRA yellow boxes. All FTI did, your Honor, was take MBIA's own financial information, and use the information that was available as of year end 2008, the most currently available information. Essentially made the decision, where Mr. Buchmiller would talk about it, when I put an eight in or put a 12 in, and they use the most currently available information and they ran it through MBIA's model and they come up with negative $2 billion using that 5.03 discount rate. We will talk about why New York cases, including two decisions of the Court of Appeals, make it quite clear an agency must use the current information that is available and certainly, to use information that was, if there ever was a time in the history of the United States when someone doing a financial review should have used the most current information, it was clearly in the early part of 2009, after we had gone through the heat of the worst financial crisis in 50 years, particularly if you were an insurance regulator and your mandate was to protect the policyholders. Now, that $2 billion number, negative policy surplus of $2 billion, that's just correcting, your Honor, and using the most currently available information for 17 RMBS transactions -- just 17 RMBS transactions. Now, let's turn to 22. Even if, your Honor, you were to try to use this

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PROCEEDINGS - GIUFFRA policyholder surplus within a year, actually by the end of the year the transaction was approved, from green to red, was immaterial. MBIA's own expert conceded it was. Let's put up slide 21. The original, the original extreme stress number as of year end 2009, had a positive policyholder surplus of $362 million. The correction takes it indisputably to $291,000,000. That assumes, your Honor, that they apply a 5.23 discount rate. Sort of a little bit of an exchange you may recall about whether the right number was 5.23 or 4.03. We actually, the number is lower than that, but if you apply a 5.03 discount rate, the number goes to 424 million negative, and that's with all of the corrections that were made by MBIA over four months when they attempted to address this supposedly immaterial error. So, your Honor, under MBIA's own corrected numbers, it goes from 362 million positive, to 291 million negative and that's what this 5.23 discount rate is. If you use the 5.03 discount rate, the number goes to 424 negative and then, on the right hand side you see FTI updated extreme stress corrected. I will spend some time after lunch talking about this. There has been a lot of argument about battles of experts and battles of black boxes versus green boxes versus

PROCEEDINGS - GIUFFRA statutory capital under their extreme stress scenario, MBIA could absorb only a billion dollars more in losses until they would be, they would be bust with no contingency reserve, and that also, your Honor, we will talk about the fact that MBIA's models assumed no commercial mortgage backed losses -- zero. Now, one of the arguments that's been bandied about here, is that Mr. Greenspan didn't go forward and make a big deal about this in his report. Mr. Greenspan is not an accountant. His report was focused on essentially running MBIA's model with the most currently available information and he basically showed that you turn the number, almost by $2 billion. So, we were looking for a simple, straightforward argument. We didn't know it did not have visibility into this error. Now, Mr. Greenspan, when he was deposed said, he wasn't certain about the error and the claim seems to be somehow he had an obligation to, you know, put everything in his expert report that might be an issue. But, I think the more telling point, your Honor, on materiality, is that the evidence, your Honor, is that MBIA's experts found this error in July of last year. As I recall, Mr. Kasowitz raised an issue with the Court either in early October, I think late October, it was right before

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PROCEEDINGS - GIUFFRA the papers were coming due, and they had been working on this issue for a number, at a minimum, weeks, but they certainly knew about the issue. The testimony is in July. So, there is four months between when they find out about the problem and they alert Petitioners and alert the Court to the problem. I think, your Honor, the fact they had to spend that much time trying to correct the error and find offsetting issues speaks volumes. In addition, your Honor, your Honor said well, it's not about an intent here. What is the facts. It's not about whether one expert or another expert found something or didn't find anything. The issue, your Honor, is that the materials that were relied upon by the Department were wrong. They were wrong in a material respect, and as a result, your Honor, we think the Court should annul this decision. Now, I would like to turn to another subject. The State Respondents claim that Mr. Buchmiller did not work alone. That was on May 21; 638. Now, let's put up, let's put up when Mr. Dinallo, in his affidavit, he said that he thought that Mr. Buchmiller worked with Hampton Finer, with Mr. Moriarity, and with Mr. Coulter -- that's what Mr. Dinallo thought. Let's put up Mr. Buchmiller's deposition and again,

PROCEEDINGS - GIUFFRA been interested in it, I think. "Question: But, you don't have a specific recollection of what role he had in reviewing your work, correct? "Answer: Correct. " Turn to the next slide. Mr. Peltonen, whose name was also referenced by the former Superintendent in his affidavit. "Question: I think you told us before that you didn't really report to Mr. Peltonen in connection with your work on this review; is that right? "Answer: He was not that involved with transformation, to my knowledge. That was, that was more as I said before, Scott Fischer and other people in Executive." I think I put up earlier in the proceeding, your Honor, that Mr. Buchmiller said that he reported to Mr. Fischer, who was a lawyer, came over from the Attorney General's office and was not someone who was a career insurance person. In fact, the backdated memo was written at the request of Mr. Fischer. MR.HOLGADO: I corrected you the first time that you said the Scott Fischer came from the Attorney General. It's not correct then and not correct now. Point out

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PROCEEDINGS - GIUFFRA I mentioned yesterday, it's one thing to rely on words in an affidavit. It's another to fully put up what people said when they were being deposed. Here, we have Mr. Dinallo's quote. So, Mr. Dinallo, in his affidavit at paragraph 51 said, quote, I delegated to Mr. Buchmiller, under the supervision of Messrs. Finer, Moriarity and Mr. Peltonen, the responsibilities of determining the scope of his review of the financial issues pertinent to the transformation application, close quote. So, we speak to Mr. Buchmiller on September 28th and we asked Mr. Buchmiller, quote, what role did Hampton, Mr. Hampton Finer play in reviewing your work in connection with the transformation transactions? "Answer: I don't know what role he had. "Question: Did you ever speak to Mr. Hampton Finer about your work in connection with the transformation transactions? "Answer: I don't recall specific occasion or instance." Let's turn to the next slide. "Question: What role did Mr. Moriarity play in reviewing your work? "Answer: I don't specifically know what role he would have had. He would have, he would have certainly

PROCEEDINGS - GIUFFRA Hampton Finer was in the executive office in the Insurance Department, your Honor, so that is possibly who he is referring to there. THE COURT: Okay. MR. GIUFFRA: Let's put up slide 26. This is an argument that was made to your Honor on May 21, pages 642 to 643. They are citing it, your Honor. It was his full responsibility. I don't think anyone is disagreeing with that. Even that footnote is worded in terms of duties. That the duties with respect to the transformation review among the Department examiners rested with Mr. Peltonen, not with the, with Mr. Buchmiller, not with the exam team. But, Mr. Giuffra I guess, is trying to argue that this meant that Mr. Buchmiller does not have any kind of support system around him as a result of that ongoing statutory examination that was being conducted. I think that's simply not true, close quote. What did Mr. Buchmiller say at his deposition? "Question: Okay. So, it would be fair to say that the Department examiners had no duties related to the Department's review of transformation; is that correct? "Answer: Not specifically transformation. It would be with respect to the examination. "Question: Why don't you take a look at footnote

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PROCEEDINGS - GIUFFRA one of your affidavit. You see down at the bottom it says the Department's examiners had no duties related to the Department's review of the transformation? Do you see that? Yes, that's a true statement. Yes." Turn to the next slide. Mr. Buchmiller on September 28th, 2010, your Honor. "Question: So, it would be fair to say that no one in the Department assisted you in connection with your review of the financial condition of MBIA Insurance in regard to the Department's review of the transformation transactions? "Answer: Yes, that would be generally true." Slide 19. MBIA's counsel made a big deal about the fact that Mr. Buchmiller supposedly had a running start, your Honor, and started really working on his review in July 2008. At one point we heard that the review really was a year long review. There was documents indicating a year long review. Our view, your Honor, the real review started probably January 9th and was done by February 11th. But, this is an e-mail that was shown to the Court. Any materials that were given to Mr. Buchmiller in July of 2008, as far as we can tell, are not in the administrative record. Now, let's put up and let's focus, your Honor, it's

PROCEEDINGS - GIUFFRA Fallon and Mr. Wertheim. So, that's basically some of the most senior people in MBIA, including the general counsel, I believe, and Mr. Fallon I think was the President at that point, and Mr. Sonkin was the head of this insured portfolio management, was McKiernan's boss. And, Mr. McKiernan is writing to senior management. He is saying, quote, this is one hell of a request to turn around this quickly. Can't be done, but we will provide what we can. Obviously, giving the FOIL issue we are facing, giving them our models gives me pause. Ram, who references you crafting a document, which I assume related to anything we give them being a trade secret, et cetera, if any of you have comments or concerns, please let me know, but we are scheduled to be at the -- must be a typo -- BYID at 2:30 tomorrow. Go to the next e-mail -- one up. Then, Mr. Sonkin writes back, to keep you aware, I am concerned about the scope of this request and where it can lead. Ram is aware and needs to guide us, but I don't see this as the educational process it may have been originally represented to be." And then, the e-mail gets sent, this e-mail from Mr. Sonkin gets sent to Mr. Brown. Mr. Brown writes back, not as advertised, but my guess with the SCA, CIFG situation looming in the next few weeks, they want an eye level

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PROCEEDINGS - GIUFFRA July 16, 2008, 2:29 P.M. The subject is MBIA's portfolio. So, the MBIA folks start sending e-mails amongst each other later that day. Let's put up 29. Actually, put up the whole document so the Court can see it. Mr. Buchmiller, your Honor, is apparently having some involvement on July 17th and there is e-mails that are being sent among senior management at MBIA that afternoon. This is the bottom of the document. MR. HOLGADO: What's the exhibit? MR. GIUFFRA: MBIA plenary 2. MR. HOLGADO: This is not a PX? MR. GIUFFRA: It's not a PX document. This is a document that we are responding to the other side's presentation. Let's go to, actually go to the bottom. The original chain, your Honor, Mr. Kasowitz, go to the second page. Right at the bottom is the original e-mail that was put before the Court. As you may recall, that's the one Mr. Kasowitz focused on. Let's turn to the next e-mail. Go to the next page. This is from Mr. McKiernan to Mr. Sonkin, Mr.

PROCEEDINGS - GIUFFRA confidence. Maybe Ram, you should have a call with Jack. Then, Mr. Sonkin then writes back to Mr. Brown, "already following back in interim A.M. Will have enough for form, but I want it somewhat limited for the initial certification." It goes back and comes back to Mr. Brown, quote, we should mention Wachovia deal as some evidence, so we know what we are talking about." The answer is "agree". The point is, we are making, your Honor, is that the presentation was made that somehow this review started in July. There is no evidence to support that, that we are aware of. The review started, there were interviews in December, but the real work started on, on January 9th. Now, let's sort of go forward. If, in fact, your Honor, Mr. Buchmiller had been working at MBIA for many months, and working closely with MBIA's insured portfolio management team, it certainly raises a question about the following e-mail. Let's put up number 30. This is an e-mail that was sent, I think we showed it to the Court previously. This is an e-mail from Mr. Pastor to Mr. McKiernan. This is PX number seven and there is going to be a meeting on the 23rd, your Honor, with Mr.

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PROCEEDINGS - GIUFFRA Buchmiller. I will talk a little bit later about the manual overrides. I think your Honor saw the document where Mr. McKiernan, at home, redacted the amount of those manual overrides from a presentation that was provided to management at MBIA. It certainly raises the question, if they were being so transparent with the Department, why was he redacting the amount of the manual overrides, which were in bold in this proceeding, before giving it to the Department? But, if you accept what MBIA is saying, if you accept what MBIA is saying, the Department that Mr. Buchmiller had been spending a lot of time in, the Department, I mean at MBIA, in the period from July to December, the question really that one must ask is why is Mr. Pastor saying, quote, I can probably give you some insight on the Department, but given these guys don't have any subject matter expertise on STF, that structured mortgage, it forces you to have, to find a spoon fed approach. You sort of can't have it both ways. He was either there and the take away that the MBIA's executives had, was that Mr. Buchmiller did not have subject matter expertise on structured and mortgage, very complicated subjects, and raises the question perhaps, that Mr. Buchmiller wasn't

Petitioners-Giuffra T6 They looked at nullity sector CDOS, and we'll talk about what he said in the memo which is: "I looked at one of each type in any kind of detail." Then he started looking at CMBS. That's the commercial mortgage-backed securities. Now, there is no evidence that Mr. Buchmiller looked at MBIA's $8.5 million CDO Squared portfolio, even though two of MBIA's ten worst transactions, most risky transactions were CDO Squared. In fact, your Honor, Mr. Dinallo testified to Congress in the spring of 2008, when this issue of monoline insurance was first coming out, that he thought that monoline shouldn't be able to insure CDO Squared because they were such potentially toxic structured products. CDO Squared is essentially a whole bunch of CDOS all wrapped in one product. Now, let's put up slide 20. I showed you this before, your Honor, and I'm not going to spend much time on it, but, again, it raises the question that we have talked about yesterday, which is it's one thing to put forward an affidavit written by a lawyer. It's one thing to have a lawyer say very, very extensive thorough review, which we heard, and it's another thing to look at the contemporaneous e-mails
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PROCEEDINGS - GIUFFRA doing anything from July to December and that's just overstatement. Mr. Holgado, the exhibit on the document I put up, that e-mail chain after Mr., the July 17th e-mail that's PX 1268. MR.HOLGADO: Thanks. MR. GIUFFRA: Now, your Honor heard a lot about a risk focused examination approach taken by Mr. Buchmiller. Essentially, all that meant was that Mr. Buchmiller was prioritizing his review, looking at the riskiest sectors first. The fact that you are doing a risk based review doesn't mean you don't have to do a thorough review. You are just looking at the places where the biggest problems are going down, and seeing how far down you can go to find other problems. Our view, your Honor, is the evidence indicates that Mr. Buchmiller reviewed second-lien RMBS. We look at it thoroughly different way. Didn't look at it the way a team of people from either Black Rock or FTI or some other group of highly specialized people would have looked at it. (Continued on next page.)

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Petitioners-Giuffra and look at where those contemporaneous e-mails fit in on the timeline. Your Honor, as best we can tell, looking at the documents, the application was filed on December 5, there definitely were interviews in December, no question about it. There was a meeting on December 23 where Mr. McKiernan had redacted the amount of the manual overrides. Your Honor, there is that January 9 scope of review memo, which we went through. I'm not going to do it again. Then on the 30th Mr. Buchmiller is expressing some preliminary opinions, and there is little doubt that, you know, his last communication that we know about is February 11. And we know that there was a draft of the approval letter sent to the department, to MBIA on the 13th, and we know this was approved on the 17th. When you look at those e-mails where he's talking about trying to find a short cut, not having an adequate sample size, not having time to look in all the haystacks, narrow review, limited scope, I think the documentary evidence is fairly clear. Now, as best we can tell, he did his work on RMBS and CDOs between the 9th and the 30th. He writes

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Petitioners-Giuffra that e-mail on the 30th, which then gets sent to the folks in the department, and then he returns to CMBS. It looks like the CMBS review was done between February 2, and the rest of the review, between February 2 and February 11, which is a little more than a week by one person. The CMBS portfolio was $45 billion. They were proposing having zero reserves. Now, let's put up no. 34. Mr. Buchmiller is basically reporting to Hampton Finer and others in the department, your Honor, you know, where he stands, and he then says, quote: "The next hurdle, CMBS/CLO, etc. will take weeks, not days." MR. HOLGADO: Can you read everything before -- I'm sorry. MR. GIUFFRA: You will have your chance, Mr. Holgado. MR. HOLGADO: Okay. THE COURT: Thank you. MR. GIUFFRA: So he's saying the next hurdle, CMBS, CLO etc. "will take weeks, not days." This is February 26. We know the last memo he sent is on the 11th. He says that those sectors, your Honor, he says -- and I think this is very important. This is

Petitioners-Giuffra expect in a rather free-falling economy," close quote. He knew the economy was in free-fall, he knew that they had zero reserves on CMBS. Of course, they had concealed from him on December 23 those manual overrides and the amount of the manual overrides. The other side will stand up and say, oh, oh, Mr. McKiernan said he told him about the amount of the manual overrides. What's the evidence on that, your Honor? The evidence is Mr. McKiernan's word versus what Mr. McKiernan did in real time. It took the information out of the presentation. That's the evidence. And there is also the fact that the manual overrides is not listed in any one of Mr. Buchmiller's memos. Presumably, if he thought it was important, he would have put it down. In addition, your Honor, in addition, your Honor, we heard last week about how Mr. Buchmiller had an interest in Aldo's Italian restaurant and Fortunoff, and everyone laughed, thought it was funny. Presumably, Mr. Buchmiller would have had an interest in knowing that they were engaged in manual overrides to the tune of $900-plus million at a time

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Petitioners-Giuffra Mr. Buchmiller's own words contemporaneously, quote: "They take more time than second lien and ABS CDO models, as we'll be looking for why they aren't or why they should be reserved, as opposed to how they are reserved; i.e., looking for more needles in the haystacks, as opposed to measuring the needles they found in one or two stacks." What does he means by that? What he means is MBIA already has reserves on RMBS. They have reserves on CDOs. They don't have reserves on CMBS. He says, well, really, this is going to take me more time. You know, what do we know, your Honor? We know he started looking at the RMBS and the CDOS on January 9. It's already February 2. Let's say it took him three weeks, from the 9th until 30. He's now saying it will take me more time to look at CMBS. And we note the last communication is on February 11. So what does Mr. Buchmiller then say? He says: "We know those models are priorities." Then he talks about -- and he's concerned about this. You see this in the backdated memo, quote: "Commercial real estate and corporate credit are showing general signs of weakness; i.e., Wall Street Journal and other anecdotal evidence, as one would

Petitioners-Giuffra when they had zero reserves on CMBS. They did not tell him that in December. MR. KASOWITZ: Objection, your Honor. I'm deal with it on Monday. THE COURT: Okay. MR. GIUFFRA: Your Honor, look at the skepticism that's being expressed by Mr. Buchmiller. He says, quote: "Unlike residential real estate, no one was lured to sleep believing these assets will never go down." "So they're probably being structured like auto ABS probably." Again, he's talking about weeks to do this analysis. Let's put up number 35. Again, contemporaneous documents, your Honor. This is an e-mail February 3 to from Mr. Fischer. I believe, if I'm not mistaken, this is one of the e-mails, your Honor, that your Honor made available to us recently. So I haven't had a chance to talk about where this e-mail fits into the story. This is one of the ones you made available. What does he say? Now, look. On the 2nd, your Honor, Mr. Buchmiller is telling folks at the department it will take weeks, more time than the three

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Petitioners-Giuffra weeks he'd already spent looking at CMBS and RMBS. The next day, your Honor, Mr. Fischer, who is the only person Mr. Buchmiller can describe as someone who is supervising him, is basically telling Mr. Buchmiller, quote: "It seems likely that Eric will make a decision on the reorganization this week -- probably on Thursday, assuming that he approves, we'll need to provide the approval quickly. "Whatever formal memo you were anticipating preparing would need to be done as a part of the approval process. "Your final work product doesn't absolutely need to be done prior to the approval, but it should come shortly thereafter." The point, your Honor -- and we didn't have this e-mail -- is Mr. Buchmiller is telling him it's going to take me weeks to look at CMBS, to look at CLOs. It will take more time than it took to look at CDOS and RMBS. They're basically telling Mr. Buchmiller that Mr. Dinallo is going to make a decision this week. He certainly doesn't seem to be too interested in waiting to go find out what's happening with Mr. Buchmiller's review of CMBS.
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Petitioners-Giuffra and fusion transactions from the 2006 through 2008 vintages were generated to an expected loss of about 2 percent. "Given recent developments in the global economy and the forecasts for U.S. commercial real estate in 2009 and beyond, Moody's now expects the deals from these vintages will experience losses of approximately 5 percent on average." This is a big shock and something that causes Mr. Buchmiller to say, I've got to do some more work. They want to make a decision on, literally, this day. As you will recall, your Honor, there was an e-mail we put before the court where MBIA folks are reporting to each other that this Moody's study spooked the hell out of Mr. Buchmiller, spooked the hell out of him. I put it before the court previously. That's let's put up no. 37. This is the February 11 e-mail which is the last e-mail that Mr. Buchmiller sends. We've talked about this before, but he says, quote: "After last Thursday's meeting" -- that's at February 5. There must have been some talk about having a decision then -- "I was working against the deadlines of approximately today to look into all the other haystacks."
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Petitioners-Giuffra In fact, Thursday, your Honor, would be December 5, two days later -- I mean, excuse me. THE COURT: February. MR. GIUFFRA: February 5. It would be two days later. That's what Thursday would be on the e-mail. We've done the math. So Fischer is telling this to Mr. Buchmiller, that Dinallo likely is going to make a decision on February 5, and, your Honor, as you may recall, MBIA had asked for approval by January 31 because they were concerned that the Bridge and Raymond James opinions were becoming stale. Now, let's turn to slide 36. On February 5, your Honor, Moody's issues a report talking about CMBS, and Moody's says, among other things, quote: "Commercial property values declined sharply in 2008 and are expected to continue falling over the next 12 to 24 months. "Not surprisingly, delinquencies on CMBS loans are also on the rise." And he talks about them expecting, down at the bottom, the deals from vintages-- that's from 2006 to 2008 vintages -- "will experience losses of approximately 5 percent on average." Let me read both, so we're clear: "Conduit

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Petitioners-Giuffra He then says: "Obviously, this isn't sufficient time to go as broad or as deep as one would hope to do in a normal examination." Our point, your Honor, is that he'd said previously that it was going to take him weeks, more time than it took to look at RMBS, more time than it took to look at CDOS, more time than it took to look at CMBS and these other sectors. Yet essentially he's being forced to do the review and in a very, very, very short timeframe. Your Honor, the statement was made by the state respondents -- let's put up 38. This was on May 21. It's "high-yield CDOS, collateralized loan obligations, corporate finance, insurance, intellectual property, future cash flows, consumer finance, art of finance, student loans, rental rates." Then he basically said that Mr. Buchmiller concluded that these sectors were not of significance to him. That's what the court was told at page 713. What did Mr. Buchmiller say in his final memo? Let's put up the final memo 39. What he said, your Honor, was that they weren't of concern to him. He didn't suddenly do a reverse on CLOs, which he said was a subject he was concerned about in that earlier memo earlier in February -- excuse me -- in

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Petitioners-Giuffra January 30, January 30 No, what said in his memo, your Honor, was, quote: "There was insufficient time to look into other sectors which may be of concern, such as CLO" -- that's Mr. Buchmiller's words, not mine -- "such as CLO, high-yield CDO, future flow, or public finance where the past is unlikely to be prologue." So what Mr. Buchmiller is saying is I didn't have a chance to look at these sectors that he was concerned about, and I'm concerned about them, but the department wanted to get this thing approved, and he went and did it. I'll stop right here for lunch, thank you. THE COURT: Okay, thank you, Mr. Giuffra. We'll take a break, and I will see you all back here around 2 o'clock. MR. KASOWITZ: Thank you, your Honor. (Luncheon recess taken) AFTERNOON SESSION THE COURT: Okay. MR. GIUFFRA: Hope you had a nice lunch, your Honor. THE COURT: Well, I was a little busy. Okay. Hope you did, too. MR. GIUFFRA: All right, your Honor, I'd like
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Petitioners-Giuffra remove the references to the amount of manual overrides in the presentation that was given previously to management at MBIA. I think that raises, obviously, the clear question of how could one say that this was being -you know, that he was part of -- okay, here it is; I'm sorry. Your Honor, this is a document we showed you previously. On the 22nd he's essentially going --e-mailing between his e-mail account and his wife's e-mail account. He's removing from this presentation which he essentially just marked up that had been previously given to management the fact that the amount of the manual overrides could be as much as $949 million. What I think is the most telling part of this is that in the conclusion of this entire draft document which he had previously given to management at MBIA, they essentially took out the one thing that was in bold, and that is that, quote: "If a more stressful economic environment ensues (negative GDP, unemployment closer to 9 percent), material erosion to MBIA's positions will occur and, depending on large blown performance, losses to MBIA could range from zero to $950 million."

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Petitioners-Giuffra to turn to a subject that the other side raised in their case, which is that our position is that the department couldn't have made a decision until the exam that was going on -- it wasn't done until the next year -- was completed. That's not our position. Our position, your Honor, is that the New York Insurance Department could not do a thorough financial review in the time that they did, January 9 to February 11, particularly the CMBS, in, literally, several days with a one-person review team, and that they could have done a lot more. So on the CMBS, I think going through the e-mails that we now have, it's pretty clear that Mr. Buchmiller essentially spent two days looking at CMBS CDOS before February 11, and MBIA had zero reserves on a $45 billion portfolio. Now, I mentioned before the manual overrides, the whole issue of manual overrides. If you could put up slides 50 and 51. I apologize, your Honor. We'll come back to this. THE COURT: Okay. MR. GIUFFRA: Why don't I just keep going. So, your Honor , from the exhibits we put up before it was clear that Mr. McKiernan had made the judgment before the meeting on the 23rd of December to

Petitioners-Giuffra Our position, your Honor, is that there really was no good reason to eliminate this from the presentation to Mr. Buchmiller if he were, in fact, trying to be transparent, our position, your Honor, is that -MR. KASOWITZ: Excuse me. I'm just going to object to it. If he wants to read Mr. McKiernan's testimony about it, then he ought to. But I'm just noting the objection for the record. MR. GIUFFRA: But, your Honor, our position is that we're not arguing that manual overrides, per se, are inherently flawed. Our position is that the fact that they were engaged in these manual overrides, basically taking the numbers that were coming in off the MBIA commercial mortgage-backed security model and reducing them, that's the kind of thing that should have been discussed in some detail with Mr. Buchmiller. Now, he testified he was aware of the fact they were doing this, but he had no recollection of knowing what the amount of the overrides was, and there is nothing in the written record that indicates that he was aware of this number 950. I agree with Mr. Kasowitz that Mr. McKiernan, a MBIA employee who wanted this transaction to go

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Petitioners-Giuffra through, claims he told Mr. Buchmiller about these overrides, but you still have this issue: Why is he deleting this from a document he'd previously shown to his own management team? It's clear that Mr. Buchmiller, from his deposition, never saw documentation supporting any of the overrides. As Mr. Greenspan in his first affidavit at paragraphs 320 and 321 notes, these overrides essentially reduce losses by $5.3 million, and the impact was as much as $950 million. But there is no instance that we're aware of where MBIA, in engaging in this large-blown override process, increased the reserve. The large-blown overrides all went in one direction, and that was to lower the reserves. Now, let's turn to the final memo, which is Buchmiller 44. This is the sentence that's now been completely unredacted. It's clear that Mr. Buchmiller qualifies his conclusion that: "I did not find evidence that MBIA Insurance is inadequately reserved, based on what we know as of today, mid-February 2009." This is on page 1. But he then goes on to say, quote: "This
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Petitioners-Giuffra and he's not fully aware of what they are doing. You know, we have Mr. McKiernan's testimony, but we don't have any documentary evidence indicating he was ever told the amount, and there is no evidence that he ever saw the back-up spreadsheets. I mentioned before -- let's put up 36, please. This is this Moody's report that comes down on February 5 which I showed your Honor before lunch. Now let's turn to 45. The last piece of that under "read" was redacted previously, your Honor, and in "read" MBIA says that: "The Moody's CMBS stress case is a more extreme macroeconomic scenario." Mr. Buchmiller in now unredacted portions of his memo says: "We shall see." This is on page 18. Let's turn to 46. This is another portion that had previously been redacted under known unknowns on page 32 of this memo. Just to quote part of it in yellow, quote: "Some of that answer is in MBIA's extreme scenarios." Again, it indicates Mr. Buchmiller's focus on those extreme scenarios and the importance of them to his review. Then he says: "But some assumptions or projections in the CMBS Lehman stress case and maybe S & P have already been overrun. Were the Moody's and

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Petitioners-Giuffra conclusion does not reflect what we might also fear as of today because 'reasonable men may differ on those.'" MR. HOLGADO: Your Honor, before we continue, the way it's going to read in the transcript is that that's what memo says. He just added some words. That's why there was a long pause. He added some words. That's not what it says. The memo will speak for itself. MR. GIUFFRA: Absolutely true, but the point, your Honor, is he then talks about one of the fears that he's focused on. Your Honor, obviously, has the memo. One of the fears that he's focused on is that loss projections are greater and are longer than considered in stress scenarios, and he specifically identifies CMBS. If your Honor goes through that memo -- you, obviously, have it -- in multiple places he's very focused on CMBS because MBIA has zero reserve on CMBS. Obviously, your Honor, without reviewing these manual override adjustments in some detail, there is no way for Mr. Buchmiller to extrapolate from the review of one CMBS transaction to what they're doing on all the rest. Clearly, this manual override process is an important part of the reserving methodology at MBIA,

Petitioners-Giuffra Deutschebank analyses of CMBS better and more pessimistic? I don't know, as I've not yet read them." Now, Mr. Buchmiller is admitting in this file memo that he knows that MBIA's CBMS stress assumptions have been overrun. He admits not having read what Moody's and Deutsche Bank have previously focused on with respect to CMBS. So, there's a real question here. If he was spooked, as we showed you in an e-mail previously on February 5, why has he not gone and read the Moody's analyses before this transaction was approved? This is, as we know, written in March and April. Now, the last -- let's put up 47. The last e-mail that we have going from Mr. Buchmiller to his supervisors -- we have seen this multiple times -talks about how S & P and Lehman published stress tests of the CMBS sectors. Look at the dates of those stress tests. S & P is the May stress test, and the second one is the Lehman stress test, and these were outside research -we talked about this -- that were published in June and July of '08. That's what Mr. Buchmiller is referring to

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Petitioners-Giuffra when he talks about overrunning. And the MBIA CMBS analyses were based, your Honor, on Lehman's public research in June and July. (Continued on next page) (End of take 6)

PROCEEDINGS -GIUFFRA not. Did the information sufficiently take into account the financial crisis that obviously hit the world economy in the fourth quarter of 2008? And, it's not about all of the experts because obviously, any projection is an estimate of what's going to happen in the future. But, if you run a projection with bad, stale data, the projection is not worth anything. The problem here is that in the middle of the financial crisis when, if there was ever a time when you needed to be sure you were using the most current available information, MBIA was not doing so. Now, let's put up the transcript of this hearing on May 29th, 1172. Mr. Kasowitz said to the Court on page 1172, that what Mr., quote, what Mr. Buchmiller was clear about and what Superintendent Dinallo was clear about, that notwithstanding whatever was in store, there were legitimate needs to take action and that's what they were determined to do based on a very extensive and conscientious analysis of the best information that was, the best information that was available to them." "The best information that was available to them." MR. KASOWITZ: Would you read the last -- it's so good, would you read the last part?

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PROCEEDINGS -GIUFFRA T7 MR. GIUFFRA: Now, in this document Mr. Buchmiller says, quote, I have not had a chance to look at what Moody's has put out since last week's announcement re CMBS." That's the February 5th document that we put up before. And, he also says that he hadn't had time to look quote, hasn't had time to go through, in detail, the Excel files given to him by MBIA based on the S & P and Lehman analyses. What's the date of those documents? The analyses one is based in May 7th and the others are based on June and July, before the financial crisis hits. This clearly makes the point that Mr. Buchmiller did not have sufficient time to review all of the available information. That's one of the standards in an Article 78-case that the Court of Appeals has talked about. Regarding CMBS, the sector that the MBIA had zero loss reserves on as of February 11th and, in fact, in his memo, the now unredacted portion makes it clear he hadn't had time to review the Moody's February 5th report, as of whenever he wrote that memo. Now, a lot of the focus of Respondents is on this, us supposedly challenging the model that MBIA was using. The primary focus of our presentation is on the, whether the information that was run through those models was stale or

PROCEEDINGS -GIUFFRA MR. GIUFFRA: Sure. "When you look at the total context of things." The law is clear -- put up slide 48. These are two decisions by the New York Court of Appeals, that an agency cannot rely on stale, inaccurate projections. The first case is Maltbie from 1937 and the second one is New York Telephone Company, 1971. In the Maltbie case, an economist gave the Public Service Commission a forecast in May 1932, kind of eerie that it's back in the Great Depression, as opposed to the Great Recession, that prices would continue to decline. And the PSC could have, the question was, you could have relied upon those projections in May 1932. But, the PSC didn't make their decision until June of 1933, by which time prices had increased, and the Court of Appeals held, your Honor, that the PSC could not rely on an outdated projection because actual experience had shown that the projection was inaccurate. Here, you have MBIA's model being based on CMBS on analyses that were done in June and July, before the heat of the financial crisis, and we will talk about what happened with respect to RMBS, the New York Telephone cases, quote, the law is well settled that the PSC may not rely on reckoning, when actual experience is available that

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PROCEEDINGS -GIUFFRA establishes that the predictions have been substantially incorrect, close quote. The Court went on to say that, quote, commissions are bound to take into account drastic changes in economic circumstances. The Court there said that PSC had acted arbitrarily. If there ever were a time when there were drastic changes in economic circumstances, it was in the fourth quarter of 2008. It's hard to think of a time in any of our lifetimes when there were more drastic changes in economic circumstances. Now, let's talk about those CMBS analyses. Let's put up the final memo. I showed you that on February 11th, Mr. Buchmiller was focused on, among others, that S & P analysis. He says, he talks about the S & P stress case and then he says quote, their expected case assumes a short and mild recession -- probably an obsolete assumption now. That was an S & P analysis from May. So, Mr. Buchmiller, in his own words, is talking about the fact that MBIA, CMBS projections are based on obsolete assumptions. Let's turn to 50. Here, Mr. Buchmiller is talking about again, the same memo on page 32.

PROCEEDINGS -GIUFFRA relying upon. That wasn't reflected here. I will note it's the same objection. I will deal with it on Monday. I just want to note it because we objected to it the other day. MR. GIUFFRA: If you just read Mr. Buchmiller's report, your Honor, he is concerned about whether they are relying upon outdated information. There is no question, as reflected in the February 11th e-mail, that MBIA was relying on assumptions from S & P from May and Lehman from June and July. And, this transaction, of course, gets approved in February 2009. So, under the Maltbie and New York Telephone cases, we don't believe that the Department could rely on an outdated CMBS analyses of MBIA that were based on assumptions that were known to be obsolete and overrun. Now, your Honor, MBIA's RMBS, those are the residential mortgage backed security projections, they were also based on outdated data. Let's put up 52. Your Honor, as we showed you previously, in the third quarter of 2008 earnings presentation, MBIA increased its loss estimates for RMBS. That's PX 956. Why did they do so? Because there had been, quote, an increase in early stage delinquency from Q2 combined with steady Roll Rates, close quote.

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PROCEEDINGS -GIUFFRA Quote, but some assumptions or projections in the CMBS Lehman stress case and maybe S & P, have already been overrun." Let's turn to 51. This was a document we showed your Honor before. So, there was public research that was put out by Lehman in June and July, and MBIA based its CMBS projections on that June and July research search. But, in fact, in September 2008, MBIA put out, excuse me, in September 2008, Lehman put out new research, updated research, to take into account that we were in the middle of a financial crisis. That document, which is, was in MBIA's files, so there is no question about them not knowing about it, said, quote, outlook worsens for commercial real estate, close quote. Then, it goes on to say, quote, given the potent cocktail of deteriorating CRE space fundamentals, and increased dislocations in the credit markets, along with a weakening macro economic picture, we increase our lifetime deal losses for recent vintage CMBS. We also widen the range between our base and stress case forecasts." So, you think -MR. KASOWITZ: Excuse me. We objected to this the other day. It mischaracterized the NOI that we were

PROCEEDINGS -GIUFFRA Now, let's put on slide 27. MBIA made a presentation to the Department, PX 502. where they said that, quote, early stage delinquencies continue to increase during the fourth quarter. Early stage delinquencies increased by 28 percent as compared to the third quarter. So, while in the second quarter and going to the third quarter when they started to increase, they increased their reserves, there was no increase in second lien RMBS reserves between the third and fourth quarters -- zero. Now, MBIA, your Honor, did not run, as of the time of the, when Mr. Buchmiller was done with his work, they didn't run their RMBS models in the fourth quarter. Didn't do it. And, your Honor, let's put, I think this is a very important document, 54. This is the conversation between Mr. Uppuluri and Mr. Buchmiller that was tape recorded, and they are talking about how you go about running this RMBS and Mr. Buchmiller's involvement in doing his review of RMBS second liens. Mr. Uppuluri is saying well, quote, we had data up to June, July, when we first did our projections, so we used that." Then, to the next page, quote, you see there is

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PROCEEDINGS -GIUFFRA something called "settle date"? That's the third box from left at the top. It says 12/31/08, close quote. Then, Mr. Uppuluri continues, so that's the last, last month of information that Intex has at this point, close quote. So, your Honor, when this is being, when this is being tape recorded, Mr. Uppuluri and Mr. Buchmiller are literally sitting at a computer. They are literally sitting there and pushing buttons and Mr. Buchmiller is in the position where he can decide what information should be used. And, Mr. Uppuluri in fact, says to Mr. Buchmiller, quote, we could use that, meaning the 12/31/08 information. But, that is not the timeframe we used in our loss reserve process. So, you can choose whichever you want. We can use this latest one or just run the projections or use the one which we did, which was August 31st, and run the projection based, close quote, and okay, Mr. Buchmiller says okay. Then, Mr. Uppuluri says, quote, it's your choice, whatever you want to do. Then, Mr. Buchmiller says, yeah, if that's what the reserves are based on, then I would see, then Mr. Uppuluri interposes, okay, let's just put an eight there. Then, you hit the load again, so that it loads that. Okay.

PROCEEDINGS -GIUFFRA RMBS models using up-to-date early delinquency numbers in early 2009, am I correct, your projected losses would have been higher than what was projected using data from August 2008? "Object to the form. "Answer: If we ran the model using data later than August, without making any other changes to the model, we would have, we would have had an increased reserve number result from the model, close quote. So, I don't think there is a dispute here that the financial reserving information of MBIA, that was used in connection with this approval, was based, for RMBS, on August 31, 2008 information, notwithstanding the fact that the approval was in February 2009, notwithstanding the fact that the financial crisis had happened, and notwithstanding the fact that early delinquencies had increased in the fourth quarter. In fact, they had increased by 48 percent in the fourth quarter, and that using the available information and, your Honor, it was there for Mr. Buchmiller to take. All he had to do was say 12 instead of 8, under extreme stress scenario for those, just those 17 RMBS second liens, based on work that was done by Mr. Greenspan, and it would have increased the reserve by $1.9 billion. Now, let's put up 57.

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PROCEEDINGS -GIUFFRA So, the point, your Honor, is that Mr. Buchmiller is literally sitting at a computer screen with Mr. Uppuluri, he is given a choice between using the August 31st numbers or using year end information, and he elects to use the stale information. Now, I don't think Mr. Buchmiller was aware that that was a $1.9 billion decision that he was making and what Mr. Greenspan did was, he took the information that was available, as of 12/31/08, and ran it through MBIA's model. He didn't use a black box, green box or blue box, but all he did was he took 17 RMBS transactions, used the information that was available as of 12/31/08 for just these 17 RMBS transactions, and ran the most currently available information as of year end 2008 -- information available to Mr. Buchmiller. That increases the loss reserves by 1.9 -$1.9 billion in the extreme stress scenario. So, your Honor, we talked a lot about the importance of the extreme stress scenario. Now, let's say, look at what Mr. McKiernan testified about on this very subject. This is 55. "Question: This is his deposition at pages 9 -396 to 397. "Question: Now, if MBIA had run its second-lien

PROCEEDINGS -GIUFFRA This is an e-mail from McKiernan to Mr. Buchmiller, February 11th, right around the very end of this whole time period. And, Mr. Buchmiller, Mr. McKiernan is focused on extreme case, quote, the current to loss Roll Rates for currently performing collateral will start to reduce some time between March 12th and July 12th, depending on a transaction's performance through August 2008, close quote. Now, in reality, more and more people were missing mortgage payments -- that's common sense -- at the height of the financial crisis, so MBIA's prediction that the delinquencies would stay flat after August 2008, your Honor, was known to be false by any reasonable measure by July 2009 -- well, February 2009. Let's put up slide 28. MR. KASOWITZ: I will object to that, your Honor. The banks are aware of what our argument was and they are aware of the evidence that, in January and February of 2009, that the RMBS delinquencies tracked what was happening in the third quarter. We argued it, we gave testimony about it and the like, so this goes just -- this might be a nice repetition of what they argued three weeks ago -- certainly not rebuttal to the points that were made. But, just to misstate the record that way, is not

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PROCEEDINGS -GIUFFRA really appropriate. That's my only point. We can go back and repeat it. MR. GIUFFRA: There is a dispute. We don't think the delinquencies were tracking, actually because MBIA increased its reserves in the first quarter. So, your Honor, let's put up 28. This is what essentially happened -- this is PX 462 and also from, excuse me, 962, 970, 971. In August, those actual early stage delinquencies were 2.5 percent, but by December they were running at 3.7 percent. So, what would have resulted in, in terms of the FTI extreme stress numbers? It would have resulted in a 1.9 billion increase in projected losses. The idea that somehow these early stage delinquencies is flat, is obviously not true. They were up by 48 percent by December, which is consistent with what anyone would think, given where the economy was at that point in time. So, the notion, and let's put up -- I will just say it, on May 29th this, the other side of page 1260, says, oh, well, this 28 percent spike in the fourth quarter for the entire fourth quarter might be anomalous -- " that was the words used. Our position is, it would not be reasonable to put

PROCEEDINGS -GIUFFRA He was asked, neither you nor Goldin Associates made any effort, in connection with any engagement here, to authenticate, verify, quality control or stress test MBIA's data? "Answer: Of course not. "Mr. Greenblatt: He was just -- sorry, he was just criticizing MBIA for lack of authentication. " We will deal with it again. But, I am just noting it's nice to listen to this, but it's an expert without any expertise. MR. GIUFFRA: The fact that what Mr. Goldin did and what his team did, they reviewed the record and they reviewed what Mr. Buchmiller looked at. They didn't do independent work. He was not purporting to do independent work. He was a rebuttal witness. He looked at all the other expert reports put down by the other side, he analyzed them and he commented on them because of his experience as a fiduciary, as someone who is a major buyer of this type of insurance, but also, in terms of his involvement with other restructurings. We are not trying -- my point is, they played a bunch of tapes, one after another. It was kind of entertaining, I am sure, for the person who is the film clip person, but our point is, I sat down when it went out, I didn't jump up out of my seat, but Mr. Goldin and his team

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PROCEEDINGS -GIUFFRA one's head in the sand and rely on old projections, based on outdated information, and hope that mortgage delinquencies would suddenly drop to the level that was predicted by MBIA's model. That would be arbitrary and capricious under the Court of Appeals decisions in Maltbie and New York Telephone Company. Now, during their presentation, MBIA had some fun with Mr. Goldin. They used a series of video clips and claimed he didn't have expertise or relevant opinions to offer. One of the clips, we believe was out of context, where Mr. Goldin said he wasn't being offered as an expert on loss projections. But, they didn't play the next series of questions and answers about what Mr. Goldin's views were with respect to MBIA's reliance on stale data. Why don't we play that clip. (Whereupon the videotape was played, at this time). MR. KASOWITZ: This is all well and good, your Honor, except for two things. It's nice to listen to Mr. Goldin give his opinion, except for the fact that he admitted and we will play it again if we need to, that he was not an expert in loss methodology, risk of loss or any of that, and he was just asked, just made some comments about authentication.

PROCEEDINGS -GIUFFRA looked at the, looked at the record, looked at what Mr. Buchmiller looked at, and they made -- he rendered an opinion. Let's move to next subject. MR. KASOWITZ: Question, if we could, if not, I will wait until Monday, but just one question. What is Mr. Goldin's -- I had a hard time figuring this out -- what is Mr. Goldin's expertise in? What is he an expert in? I mean it's fine to go and hire consultants to go out and review the record and say stuff, but what is he an expert in? The things that he just talked about, he is not an expert in. He has admitted he is not an expert in. So, you can criticize what he said that was clipped, but the question I have is, what is he an expert in? That's all I want to know. MR. GIUFFRA: After I sat here in Court quietly and watched how they kind of had fun with Mr. Goldin, I went back to double check and read his report. Your Honor has it in one of the boxes. We will bring it here on Monday. THE COURT: I have it. MR. GIUFFRA: You should read the expert report. He lays it out, what he is testifying about and why, and

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PROCEEDINGS -GIUFFRA your Honor, as the person who is, got the black robes on, you can make a judgment about Mr. Goldin rather than have the two of us go back and forth. I think he was an eminently qualified person. The mere fact we are playing one clip after they played a sliced version of his deposition -- I think I should move on to another topic. THE COURT: Why don't you deal with it however you want to on Monday, and ultimately, I will read about the slices and dices and review it. I will make my own determination. Go right ahead. MR. GIUFFRA: Your Honor, BUK 59. Now, this is addressing some of the State's arguments and the State claimed it was reasonable to continue relying upon the third quarter 2008 RMBS projections because, and this was an argument Mr. Kasowitz made, because the fourth quarter actual claim payments were tracking third quarter '08 projections. Now, this argument, your Honor, ignores the fact that there is a time lag between the time when someone first misses a mortgage payment and when MBIA has to make a claim payment on RMBS. Obviously, there is a lag that occurs. So, if someone misses a mortgage payment, it can take months for the RMBS Trust that owns the loan to charge

PROCEEDINGS -GIUFFRA Now what, in fact, happened here? MBIA's third quarter RMBS model assumed that delinquencies peaked in August 2009. I know this is a lot of technical stuff, I have been in this case two years and it's hard for me. That's why I have to look to these guys, the basic common sense points. THE COURT: I wasn't yawning. MR. GIUFFRA: Judge, but the basic point is, as a matter of common sense, as a matter of common sense, having a model that assumes the delinquencies peak in August 2008, when it's February 2009, sort of defies common sense. In fact, it defies the numbers that they were having. They understood that those fourth quarter delinquencies were increasing. They knew there was a lag when the claims would be paid. The fact that claims payment was tracking in the fourth quarter is, to use a word, a red herring, it's an irrelevancy. The question is, when you are setting reserves, what do you do with the information that indicates to you that the delinquencies are increasing? You increase reserves, because you know you will have to pay the money at some future date. You are an insurance company. (Continued on next page.)

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PROCEEDINGS -GIUFFRA off the loan and submit a claim to MBIA. Let's put up 60. This is Mr. McKiernan, and at his deposition page 366, quote, so would it be fair to say we, sitting here today, your best recollection is that during 2008, MBIA assumed it would take six months for second-lien mortgage in the early stage delinquency bucket to result in a loss? "Object to the form. "Answer: That's 30 days that already -- " go to the next page, "30, might be five months then, at that point, if there is a 180-day hard charge off on the deal. It would depend on the deal, but I am just going to assume, I think that that sounds right, five months, something in that neighborhood." So, the fact that they are, their actual losses were tracking in the fourth quarter was meaningless. Because, they themselves, recognized that there would be a lag between the time when someone was falling behind in their loan and when they would have to make a claims payment. That's common sense. So, if there were big increases and people falling behind in the fourth quarter, that would be something that would fall into, would impact their claims payments in the future. But, reserves are supposed to project for the future -- protect policyholders.

Petitioners-Giuffra T8 But, in fact, what MBIA did was they waited after the transformation was approved to raise their RMBS reserve in response to the increase in the fourth-quarter delinquencies. They took no increase as of the fourth quarter, and then what did they do in the first quarter? Well, they increased those RMB loss reserves by $700 million as of March 31, 2009. Let's put up 62. This is Mr. Sonkin, who is the chief portfolio officer. This is one of those Thompson Street Events. You have seen that before from Mr. Dinallo. He's talking about the fact that they had increased their RMBS loss reserves by 700 million and giving an explanation for it. He says, quote, "As you know, you saw the amount of the increase in the reserves." That's the $700 million. "What we're looking at primarily against the reserves that were taken in the third quarter is the increase in the early-stage delinquencies that occurred in the fourth quarter and into early '09 combined with what we saw in the pipeline in terms of later-stage delinquencies.

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Petitioners-Giuffra "In addition, we haven't seen that leveling off in the housing market distress." This was an analyst's call to investors. So basically what they to is take a $1 billion increase in RMBS reserves in the third quarter, zero in the fourth quarter, and then increase by 700 million in the first quarter. Let's talk a little about what Mr. Buchmiller actually did with respect to RMBS. Mr. Buchmiller reviewed in detail just one RMBS transaction, RFC -let's put it back up. Sorry, your Honor. Your Honor, it's PX 87. Our point here is they knew there was an increase in early-stage delinquencies that occurred in the fourth quarter. They told the New York Insurance Department about it. It was part of the presentation that was made to the New York Insurance Department. What the other side said was, oh, everything is okay because our actual losses are tracking. But those actual losses would not reflect the increase in early-stage delinquencies because, as Mr. McKiernan, the head of IPM, said -- Mr. McKiernan said there was a five-month lag between someone becoming delinquent on their mortgage and having claims made. Here you have Mr. Sonkin in this analyst call,

Petitioners-Giuffra older data. They were last modeled -- and this is Mr. Greenspan's affidavit at 73 -- were last modeled, five of them were last modeled in the last quarter of '07 and the first quarter of '08. MBIA did not give Mr. Buchmiller the models for these five deals, the ones that were modeled in the fourth quarter of '07 and the first quarter of '08. They lumped them all into an aggregated single loss number, and that's at paragraph 73 of Mr. Greenspan's first affidavit. It's clear and as a matter of common sense that when you run a model, it will, obviously, affect what losses you will get. If you run models with information that goes back to the fourth quarter of '07 and the Insurance Department is making a decision in February '09, that's not a decision based on the best currently available information. It's something we heard, in fact, that was done. It's easy to say it was based on the best currently available information, but the facts are it was not. It was not. It's all laid out in Mr. Greenspan's affidavit. These differences when the models were run prevented Mr. Buchmiller from extrapolating the results
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Petitioners-Giuffra and this is their analyst call for the first quarter of '09. He's saying: "We've increased the reserve for second RMBS by $700 million." He's saying that, quote: "What we're looking at primarily against the reserves that were taken in the third quarter is the increase in early-stage delinquencies that occurred in the fourth quarter and into early '09." So the point is they knew they had a problem. They wanted to get past the approval, and then as soon as they were past the approval, they did a big increase. So you go from a billion dollar increase to zero, 700 million. Now, going back to RFC, we know that Mr. Buchmiller looked at one in detail. Now, the state claims that Mr. Buchmiller checked to make sure that MBIA used the same methodology it used for RFC 2009 consistently with respect to all its other RMBSs. That's at the May 21 transcript at 684. Not so, your Honor. As Mr. Greenspan noted at paragraph 69 of his first affidavit, MBIA used data for different months, sometimes June, sometimes July, sometimes August, to analyze 17 of its RMBS. But five of MBIA's RMBS were based on even

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Petitioners-Giuffra of his detailed review of the one RMBS he looked at to the rest of the portfolio. They just didn't give him the information that would have allowed him to do that. Let me talk a bit about the CDOs. Let's put up PX 51U, that's Buchmiller 63. We think it's very significant that we now know that Mr. Buchmiller wrote in his backdated memo: "When a choice was available, I opted for the most pessimistic scenario, for example, Lehman's stress case for CMBS and MBIA stressed and extreme cases." But MBIA did not show Mr. Buchmiller, notwithstanding the claim that they were completely transparent, and he was imbedded in MBIA and had an e-mail account at MBIA, many of the pessimistic loss scenarios that MBIA had in its own file. So let's put up Buchmiller 64. As best we can tell, MBIA showed Mr. Buchmiller five CMBS analyses predicting zero losses, which was the level of loss that MBIA had, and those were based on the S & P and Lehman research from May to July 2008. Now, how can your Honor -- when you look at the evidence, what did Mr. Buchmiller cite in his memo? He talked about the S & P and the Lehman research, and he talked about the May S & P research and the Lehman

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Petitioners-Giuffra June/July search. That's what he talked about in his memo. That's what the record is. So, those loss projections were stale by the time of their review, and as Mr. Greenspan lays out in his report, MBIA had dozens of analyses in its files predicting billions of dollars of loss on CMBS, not the zero losses that MBIA was projecting. In fact, it's clear that Mr. Buchmiller was concerned about CMBS. In fact, it's clear, looking at the e-mail, how long Mr. Buchmiller actually looked at CMBS. He looked at CMBS, your Honor, two days. He actually said in his memo, in the unredacted portion -- the redacted portion that's now been unredacted, that the Lehman stress case, the June/July, he said was the most pessimistic case. That's what Mr. Buchmiller said. Now, we've heard, oh, Mr. McKiernan said he showed him some internal analyses. But Mr. Buchmiller in his memo doesn't reference any of the CMBS analyses that were supposedly shown to him. One would think if Mr. Buchmiller is talking about Aldo's Italian restaurant and Fortunoff, he would certainly be talking about internal MBIA analyses

Petitioners-Giuffra He's talking about how the Lehman stress, which he describes as being based on June and July information, he said that was the most pessimistic model. That's what Mr. Buchmiller said. Can let's put it back. Your Honor, this is again in his memo: "When a choice was available, I opted for the most pessimistic scenario, for example, Lehman's stress case for CMBS." Earlier on in the memo, your Honor, he talks about what the Lehman stress case was. He identifies the dates of the research report, and the dates of those research reports were June and July, not the September Lehman report and certainly not a lot of the more negative ones that we have shown the court. Now let's put up slide 30. This is an internal MBIA e-mail, February 8, 2009: "How is it going on your end?" It's from Mr. McKiernan, who is the principal person who is dealing with Mr. Buchmiller. It's PX 88. Up in the corner, your Honor, is 746, which is an internal MBIA analysis showing what happens when you run the Moody's analysis. As your Honor may recall, Mr. Buchmiller in his backdated memo said he didn't have enough time to read that Moody's report that came down, I think, on

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Petitioners-Giuffra running assumptions that had losses of $22 billion, up as high as that, you would think that he would write that down. It's not reflected anywhere. What's reflected in the documents contemporaneous is that he looked at the CMBS that was based on the May to July analyses. Now, why is that important? Because each one of these investment banks in this time of massive uncertainty was trying to figure out what was going to happen in the future; no question about it. Each one of them had different analyses and assumptions that you would use to run the models. But what MBIA did, based on our belief, based on the record, is they only showed him the assumptions that supported their zero loss on CMBS. They were not open and, you know, transparent with Mr. Buchmiller. So what Mr. Buchmiller saw were those five scenarios that have zero losses. The ones in the /KWROEL oh are what Mr. McKiernan claims, that he showed him. But there is no evidence in Mr. Buchmiller's memo that he saw, you know, loss projections that were high, none at all. It's not in his memo, which raises the question, if he saw it, why didn't he write it down?

Petitioners-Giuffra February 5 that scared him. They're talking about what they were doing, and they basically say: "Eight hours all things STF. And I wish people could see you and I in the middle of the action. I really think they would respect the ball we carry and the breath of what we're doing. I think they can't deny the command we have over the subjects and how we communicate." Then he says, quote: "They are concerned about issuing the go-ahead without audited financials, and I think CMBS is a concern they simply can't shake off. The Moody's article spooked the hell out of them, and they are clearly having trouble getting past it." Now, Mr. Buchmiller in his own memo said he never even read that Moody's article, and up in the top-MR. HOLGADO: No, that's not true; I'm sorry. MR. GIUFFRA: Not the article. He didn't read the report; excuse me. MR. HOLGADO: In fact, he actually skipped the sentence where he said: "I read The Wall Street Journal summarizing the Moody's analysis, and here's what Wall Street Journal said." THE COURT: He corrected himself. MR. GIUFFRA: You know, it sounds like a

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Petitioners-Giuffra short-cut to me, but let's just keep reading The Wall Street Journal instead of the actual report. But the point, your Honor, is you look at that time date: February 8, okay? Done on February 11. Your Honor, up on 747 in that corner, that's a Moody's net loss from MBIA. That's an internal MBIA document, and Mr. McKiernan now claims that he allowed Mr. Buchmiller to look at -- look at -- your Honor, for about 20 minutes to a half-hour. That's the deposition testimony. We asked him, well, did you give it to him? And the answer to that was no, he just allowed him to look at it. Is that document in the administrative record? No. When was it produced to us? It was produced to us after Mr. McKiernan's deposition, which, by the way Mr. McKiernan's deposition after we had filed our surreply brief, and we identified all of the internal CMBS and says that they were not shown to the department, all of the internal CMBS analyses that were in MBIA's files at a time when they had zero CMBS losses, what is Mr. McKiernan's testimony? I showed him this loss projection that projects, your Honor, $7 and a half billion in losses

Petitioners-Giuffra documentary evidence is pretty compelling that if Mr. Buchmiller, who was spooked by the Moody's article, had known that MBIA, when they ran their CMBS analyses, was projecting $7 and a half billion in losses, that that's something he would have written down. What does he reference in the now unredacted part of his memo? He's referencing the Lehman study from June and July. That's what's the documentary evidence says. It's not lawyer's argument, it's not speculation. It's documents, contemporaneous documents. And our view, your Honor is that if MBIA had shown Mr. Buchmiller that they had these internal scenarios predicting, you know, losses up to $7 and a half billion, he would have written it down someplace. MR. KASOWITZ: I'm going to object because that's contradicting what the records says. MR. GIUFFRA: In fact, your Honor -MR. KASOWITZ: I'm sorry. It's contradicting what Mr. McKiernan said and what petitioner's counsel knows. So to the extent it contradicts what's in the record, I'm objecting. MR. GIUFFRA: Your Honor, I'll address what Mr. Kasowitz just said. THE COURT: Okay.

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Petitioners-Giuffra on CMBS, at a time when MBIA has zero losses. Your Honor, the point is that if this was shown to Mr. Buchmiller, you would think he would have put it down in a memo, in an e-mail. Instead of worrying about Aldo's Italian restaurant, he, presumably, would have been citing the fact that MBIA told him that running Moody's assumptions through MBIA's CMBS model would result in $7 and a half billion of losses. He doesn't make any reference to that in his file memo. Just to be clear on the record, your Honor, we got from MBIA in the plenary action that document which is 746. It was not produced, your Honor, in the Article 78. After we took Mr. McKiernan's deposition, after we had said to the court -- there was one of our charts showing all the internal CMBS analyses, with losses as high as, you know, into the tens -- almost $20 billion. Our argument was it wasn't shown to the department, Mr. McKiernan at his deposition said that he showed it to Mr. Buchmiller, let him look at it, didn't let him keep it, and, you know, we, obviously, have a disagreement. I think our position would be that the

Petitioners-Giuffra MR. GIUFFRA: Someone like Mr. McKiernan, who is a completely self-interested MBIA executive, who this year was one of the highest paid people at MBIA, if not the highest, and they reference those bonuses and how the senior executives at MBIA were not given bonuses this year because Mr. Lausky raised an issue. If one guy who actually got a huge bonus into the millions of dollars was Mr. McKiernan, the guy who has been running the modeling operation, okay? That's a fact. So, you know, just because Mr. McKiernan says he did something, we asked Mr. Buchmiller, did you ever see these? I have no recollection of it. So just because one MBIA person says I showed something to him and the circumstances around it are sort of curious, in fact, it wasn't prudent to us in the Article 78 case, the production comes after Mr. McKiernan testified, and even Mr. McKiernan's own testimony: 20 or 30 minutes I showed it to him. I didn't leave it with him. So you had someone who, clearly, was a well-meaning, hard-working guy is trying to do his best. I can't believe that Mr. Buchmiller, if he had been given that Moody's information, would not have

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Petitioners-Giuffra written it in his file memo. It defies belief. MR. KASOWITZ: Your Honor, now I'm going to object, okay? He's calling an executive of my client a liar. He hasn't seen fit to play his actual testimony, which we will do on Monday, but there's no call for this. There is no basis for it. They had that testimony -- they had those documents for a long time, and could have asked questions about it. So it's uncalled for. I understand why he's frustrated, I get it, but we'll play all the testimony on Monday for your Honor. MR. GIUFFRA: Your Honor -THE COURT: Maybe we'll take a short break now. If you want to finish up a section, go ahead. MR. GIUFFRA: Let me -THE COURT: Sure, absolutely. MR. GIUFFRA: Your Honor, why don't we just take a break right now. Thank you so much. THE COURT: Well take a short break. (Short recess taken) MR. GIUFFRA: Thank you, your Honor. Now, MBIA argued at transcript page 1216 that they told Mr. Buchmiller that there were others who were, quote, "more bearish," close quote, than MBIA
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Petitioners-Giuffra stress case for CMBS and MBIA's stress and extreme cases," close quote. We were fighting to get that for two years. The reason why that is significant is it tells you two things: No. 1, that when Mr. Buchmiller had a choice, in his own words, he opted for the most pessimistic scenario. And the second reason it's important is because he describes what he thought was the most pessimistic scenario for CMBS, and that was the Lehman stress case, which he describes earlier in list memo as the one based on the June/July Lehman information. Now, I'd like to just talk, literally, for five or ten minutes, no more, about the other Lehman work, and that's the work that was done for MBIA looking at CDOs, when they actually got a big thick report, your Honor. Here it is. It's in the record. It's, you know, many, many pages long, lots of detailed charts. They looked at 15 multi-sectored CDOS for MBIA. Let's put up Buchmiller 68. That's the summary page. As I think I mentioned to your Honor, the key part -- the thing that's the most telling about this, they say Mr. Buchmiller knew there were other people who were more

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Petitioners-Giuffra regarding CMBS. Let's put up 66. This is one of these interviews, I believe, with Mr. Buchmiller -- that Mr. Buchmiller had with the folks at the department. This is page 71. Mr. McKiernan says: "What we are today, I think it's -- it's a real crap shoot." He goes on to say, quote: "I think everybody is completely up in the air." Then there's: "Mail Voice: The street estimates are all over the place. "Anthony: They're all over the map." But it's clear, your Honor, that MBIA ran dozens of analyses using these different street assumptions, most of them would have predicted MBIA would lose billions of dollars on CMBS and, according to Mr. Buchmiller's memo, the most pessimistic case on CMBS that he saw was the zero losses in the Lehman stress analysis. If we could just put up Buchmiller 63 again, your Honor, this is a very important document. The fact that it's been unredacted is very important because what Mr. Buchmiller writes in his memo at page 33 a quote: "When a choice was available, I opted for the most pessimistic scenario, for example, Lehman's

Petitioners-Giuffra bearish. What's significant about this document is that Lehman had actually analyzed Broderick III. There is no more important fact. They looked at the very CDO that Mr. Buchmiller was looking at. Mr. McKiernan, the person who was working most closely with Mr. Buchmiller, the supposedly imbedded employee, knew that Mr. Buchmiller was looking at Broderick III. In fact, he was sitting next to him when he was operating the computer. He never disclosed to Mr. Buchmiller the fact that MBIA had had Barclays -- Lehman; excuse me; Lehman analyze Broderick III. That was highly unique information, not available publicly, not available anyplace else. Again, your Honor, going back to Mr. Buchmiller's memo, when the choice was available to me, I picked the most pessimistic. In this case MBIA made the choice for Mr. Buchmiller. He wasn't told about this Lehman analysis of Broderick III. He didn't have the choice. That's the problem, your Honor. Now, we heard last week that Lehman's analysis was a black box. As Mr. Steinberg argued, it appears the position of respondents is that whenever anyone

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Petitioners-Giuffra predicts higher losses at MBIA, whether it's BlackRock, Lehman, there's a company called FSI which we have talked about, Bill Ackman, they're all black boxes. Now, contrary to what MBIA told your Honor, MBIA knew that Lehman -- they actually paid them money to do an analysis, to do a valuation analysis. They understood that what they were doing was looking and doing valuation work, as well as helping them with the commutation order. Let's put up Buchmiller 71. This is the engagement letter with Lehman Brothers. It's PX 173, and it talks about how Lehman will provide two broad categories of services to MBIA, PX 173. What's the first thing that's listed? Quote, "Analytical work: Following the review of legal documentation, Lehman will build, run and analyze the results of the cash flows model for each CDS contract and related reference obligation." So they paid Lehman $3.75 million, and, clearly, the top of the list, what they're doing is to build, run and analyze the results of a cash flow model for each one of the specified structured products, in this case CDOs. MR. KASOWITZ: Quickly -THE COURT: What is it?

PROCEEDINGS - GIUFFRA T9 MR. GIUFFRA: 59 CDS. One thing I asked on Monday, when Mr. Kasowitz is up here, when I was sitting here, literally did not jump up once. The one thing I tried not ever, not to do, is impugn anyone's -- what they are saying. I am doing my best. A lot of what the other side does, if you actually listen, is slogans and attack what we are saying. I think it's unfair and unfortunate. MR. KASOWITZ: Just warranted him to read the words on the page. MR. GIUFFRA: I am laying the marker down, Marc. What the other side said, while they advised on commutations and somehow inflated the numbers, and as far as we are concerned, there is nothing in the record before the Court that supports that notion. During his deposition, MBIA's counsel asked Mr. Goldin about this sort of theory. Here is what Mr. Goldin had to say -- 72. (Whereupon, the videotape was played, at this time). MR. GIUFFRA: Your Honor, I would like to sum up what we have been talking about this afternoon. Slide 87. And, essentially, this is what Mr. Buchmiller did

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Petitioners-Giuffra MR. KASOWITZ: First, the three words that counsel didn't read in the first line was "as the restructuring agent," which is actually important to us. Then it wasn't CDOs. It was CDS contract in the second line. THE COURT: It does say CDS. MR. GIUFFRA: Fine, CDS contract. (Continued on next page) (End of take 8)

PROCEEDINGS - GIUFFRA not review. It's not just another data point. Clearly, there were numerous types of transactions insured by MBIA Insurance, including CDO Squared, CLO, high yield CDO, future flow, direct RMBS arbitration, international public finance. The U.S. Public Finance portfolio was reinsured by National, but the, and the international portion was still left with MBIA Insurance. We know what's going on in the world, in the international public finance area now. There were literally dozens of internal MBIA analyses of CMBS reflecting billions of dollars of losses to MBIA, using Wall Street and credit agency assumptions, and those weren't shared with Mr. Buchmiller we believe. There is a September 2008 Lehman Brothers research report. That's the public research report on CMBS. And, our view is, as reported by our support, is that what MBIA did was, they based their CMBS models on June July Lehman Brothers research, not the September research was which was more current. We talked, your Honor, about Mr. McKiernan deleting the bold italic font conclusion in the presentation that he gave to Mr. Buchmiller on December 23rd, and I find it very telling, your Honor, that that was the only thing that was in bold on that conclusion page and that's what he took out. He did it at home over a weekend.

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PROCEEDINGS - GIUFFRA Let's turn to the next page. MBIA used analyses from August to run its second-lien RMBS, not December. We reran it for just 17 RMBS, and we got a number with a billion nine in additional losses. They didn't share with Mr. Buchmiller an FSI analysis that would have predicted losses of 3.9 billion on RMBS. Now, Mr. Kasowitz will say we made the judgement, was no good. So, he could have shared with Mr. Buchmiller, he could have decided whether it was no good or not. He wanted to see, he wanted the choice. They didn't share with Mr. Buchmiller the September 2008 Lehman Brothers report predicting that MBIA would incur losses of 4.8 billion to 9.6 billion on only 15 multi sector CDOs, including the Broderick III transaction. There are the stress errors we have talked about, from the $1.4 billion deferred tax error. We have talked about the discount rate issue. And, your Honor, if I could put up Mr. Buchmiller 74. When we asked Mr. Buchmiller at his deposition about the Broderick III and Lehman study, he said yes, I would be interested in that, and then I asked him, quote, in retrospect, would you have liked to see this Lehman analysis

PROCEEDINGS - GIUFFRA during his presentation, but I went back and wanted to make sure. All we want to do is make sure we were clear about that. I misspoke on that one point. THE COURT: Okay. MR. GIUFFRA: I apologize for it. Now, in terms of fair and equitable, your Honor, let's put up FE 2. MBIA, NYID, have all said that the transformation had to be evaluated as a whole. And, I have shown you these documents previously, and they all talk about how you had to make the judgement under 1505, that this transaction was fair and equitable to all policyholders, not just some, not just the preferred policyholders, but all. As Mr. Steinberg said today, this case ultimately is not about Main Street versus Wall Street. It's ultimately about policyholders versus the owners of an insurance holding company. Policyholders versus the owners of an insurance holding company. The statute, 1505, talks about fair and equitable. As I have mentioned yesterday, there is no finding in the approval letter that the transformation, as a whole, was fair and equitable, and we talked about yesterday, about how that fair and equitable determination is different from a solvency finding, and that there are multiple provisions in the Insurance Law that deal with solvency, fair and

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PROCEEDINGS - GIUFFRA prior to February 17th, 2009? "Answer: Possibly, probably. "Why probably? "Because I am interested in different approaches, different modeling approaches -- " and of course, your Honor, as you could see, Mr. Buchmiller was interested in making the choices, and he was interested in the pessimistic information, not just the information that supported MBIA's loss reserves. I think now is the time to change to another subject, which is, fair and equitable. Let me just make one point. We went back and looked, because I want to be very careful that we were correct in what we said. There was a lot of back and forth and there was one document, which was MRX 1302, which was a Bank of America research report that MBIA had used in their presentation. And, I highlighted for the Court the sentence that said MBIA had planned to do -- I highlighted a sentence in that research report that said that MBIA planned to do the transformation, quote, as soon as possible, but within five years, and only under the condition that it can protect the interests of all its shareholders, close quote. I erroneously said Mr. Kasowitz, during his presentation, hadn't focused on that sentence and he did

PROCEEDINGS - GIUFFRA equitable and, in fact, you know, clearly -- let's put up FE 5. If the Insurance Department was, in fact, focused on fair and equitable, and so in November of 13, 2008, Mr. Finer in talking about whether there should be a third-party review. This is PX 58. He made the point that hiring a third-party analysis to look at ABS and RMBS portfolios, he said quote, would assist us in making our fair and equitable determination. " Now, MBIA hired a company called Raymond James to evaluate the fairness of this transaction. You haven't heard much about Raymond James, and that's sort of understandable. That's another one of these fairness opinions that are for lawyers to stick in their files, as Mr. Buchmiller put it. But, the Raymond James' opinion is a tautology. Let's put up number six. They basically say, we express no opinion on the proposed dividend of funds and return of capital from the company to Inc. This is PX 242-4 -- at R224, 227. This actually was in the administrative record. That's what the "R" stands for. Then, they go on to say, quote, we don't express any opinion as to any consequences that might result from

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PROCEEDINGS - GIUFFRA the transformation or the reinsurance transaction, close quote. Then they say, quote, we have not considered in this opinion, did not address any agreements or payments that may be made in connection with transformation." In our view, your Honor, using $5 billion of money needed to pay claims to set up a new insurance company, when all of the upside was going to the holding company, was not fair and equitable. Ultimately, that's what this case is about. It's about the policyholders versus the stockholders of the holding company. The transformation was not fair and equitable because it discriminated against one group of policyholders in favor of another, but it was also not fair and equitable because it put the rights and the concerns and the upsides and whatever word one wants to use, the scales were tipped in favor of the stockholders, not the policyholders. At every provision in the Insurance Law that we have been talking about, the earned surplus test, fair and equitable, the legislature has made the judgement that policyholders get protected before stockholders because of the concern that holding companies will loot insurance companies. Now, let's put up fair and equitable, seven.

PROCEEDINGS - GIUFFRA professor or some experts to say, Wisconsin regulator to come in and say here is how they should have done it. No, that's not what they did. They got some Superintendents to say here is how New York does it, close quote. Well, in fact, your Honor, the Wisconsin regulator has publicly spoken about this transaction and he has said, your Honor, quote, I disagree with the approach taken last year with MBIA," he said. Quote, my statutory role in guiding laws are to treat all of the policyholders fairly, close quote. Now, we have already shown the Court the December 23rd letter from MBIA to the Department, making it clear that MBIA would, National would not subsidize or otherwise support MBIA Insurance, and turned out the reserves were not enough. But, immediately after the transformation, it's interesting that both MBIA and the Department raised the fact, we heard about backstops, possible backstops, imaginary backstops. They both raise the fact that National was going to be separate from MBIA Insurance, consistent with that December 23rd letter. Now, let's put up number 11. This is the famous press release that's now the key document in the case, which doesn't have a record cite

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PROCEEDINGS - GIUFFRA This is Mr. Moriarity. Quote, and is the objective of the Insurance Department in approving such transactions, to insure that the insurance company has sufficient funds to pay claims of its policyholders? "Answer: Ultimately, the fair and equitable standard to protect the insurance companies is to not jeopardize the ability of the insurer, in any way, to pay policyholders, close quote. Again, this transaction was occurring, your Honor, in the middle of the worst economic times we have seen in many years. Now, at one point during the presentation of the other side, the opposing counsel said what would the Wisconsin regulator do. You may recall that statement being raised, and how we hadn't hired a Wisconsin regulator as an expert. We hired four folks from New York, who had 20 years of experience. THE COURT: Guys, guys, it's hard for the Reporters to hear. You will have your chance, you have will have a chance. Let him finish up here. MR.HOLGADO: Yes, your Honor. MR. GIUFFRA: Put up number eight. In fact, that's exactly where it is. 5/22, May 22, at 835. Quote, what Mr. Holgado said, "why not get a law

PROCEEDINGS - GIUFFRA number in it, and the Department was lauding the fact that this Department, that was supposed to protect policyholders, not stockholders, was saying quote, National, I -- National, quote, will not have any exposure to structured finance nor any international exposure, close quote. That's because MBIA Insurance was left with the international finance. What did MBIA say? Put up 12. This is their press release lauding this transformation transaction, a transaction that clearly benefits the stockholders of MBIA Inc., far more than the policyholders. Quote, our U.S. public policyholders need to know that this arm of the business will operate as a separate entity, and will not subsidize our structure business. This split, 59, formalizes our commitment, close quote. One question you have to ask yourself, your Honor, if Mr. Dinallo thought he had some sort of agreement with Mr. Brown. That's what he testified to. Now, you would think he would have looked at the press release that was issued by MBIA. You would think someone would have said, well, Superintendent, they are saying that there will be no subsidy. Your Honor, contemporaneous documents make it quite clear that one of the purposes of this transformation transaction was to start a new municipal business. That's

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PROCEEDINGS - GIUFFRA what they wanted to do. They were using the policyholders' money, in our view, to do it, but it was in order to put pressure on the existing policyholders of insurance, MBIA Insurance, so they would settle their claims for less money than they were worth, because there would be less money at MBIA Insurance, and they would be concerned about the fact that there wouldn't be enough money to pay their claims. There is no question -- I originally had 18 clients and I have two left. That's because those clients entered into settlements. Now, let's put up number 14. These are handwritten notes from October of 2008, of a man named Sonkin, who was the head of IPM. What did he write? Goal: Separation of muni and Main Street STF, question from insurance company, to enhance, to enhance new business prospects and leverage for commutations." You don't have to take my word for it, your Honor. There are contemporaneous documents inside of MBIA, where senior MBIA executives are writing notes saying exactly why they wanted to do this -- enhance business prospects for the benefit of the holding company and to have quote, leverage for commutations. This is not something we are making up out of whole cloth. It's in the document. It's in the facts. It's not

PROCEEDINGS - GIUFFRA and having the monolines to be viewed as near death, so that the banks and the rest of the policyholders would commute their policies and the insurance company could get away with paying less money than they otherwise would need to do so. So, what was this transaction about? It was about taking $5 billion that was needed to pay claims, and then forcing policyholders -- banks -- but policyholders, to take less money. Now, Mr. Brown was actually public about what he was about. He was public about what his objectives were. They were no secret. Let's put up 16. This is the same day that the transformation is announced and this is in the Wall Street -- it's Dow Jones, excuse me. What does Mr. Brown tell the world? Quote, I would expect some would be far more interested in commuting. Brown said, "they will say oh, my God, there is only 10 billion instead of 14 or 15 billion, maybe I better cut a settlement today, close quote. So, did anybody from the Insurance Department do anything about that that day? Not really. Your Honor, what happened was that MBIA wanted to, as part of their plan, to take out 4 or $5 billion, use it to start another insurance company -- this is PX number

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PROCEEDINGS - GIUFFRA slogans. It's facts. Now, your Honor, let's put up 15. Going down, this is an interesting set of e-mails and this is Mr. Brown on November 18th, '08 e-mailing the former AMBAC -- that's not monolines insurance COO -- excuse me, CEO, Mr. Fallon, who is the CEO. He says quote, with respect to the mistakes of the past on the SF side of the house, the best outcome would be for monolines to be viewed as near death, so that the policyholders, I will say parenthetically, policyholders -let me restate. Quote, with respect to the mistakes of the past on the SF side of the house, the best outcome would be for the monolines to be viewed as near death, so that the banks, parenthetically policyholders, will come to the commutation table with a price we can afford. And, Mr. Brown responds to that e-mail on November 18th. What does he say? "You have captured the essence of what I have tried to identify as the flaws with trying to solve the existing muni insurance indirectly. These are private ideas which are just speculation, as we aren't in a position to make policy in D.C. or here in New York." He is focused on commutations and creating leverage

PROCEEDINGS - GIUFFRA three -- and then, your Honor, force commutations, force policyholders to take less money. And, I think, that's contrary to every basic principle of insurance regulation. Now, there was a discussion about TARP and public funding, and we went through it the first time. I am not going to bore your Honor with some notion that our view is. Let's put up PX 26 -- sorry, it's FE 26. February 11th, before the transformation is shut down, PX 235 was all this discussion about, oh, this was possible, this was the big benefit, there might be Federal funding. There it says in Bonds Buyer, quote, Treasury Department officials yesterday appeared to close the door on providing direct assistance to monoline bond insurers as part of their economic recovery programs, close quote. Now, the New York Insurance Department counsel said MBIA didn't know of all the discussions with Treasury. Now, that's pretty public. But, it gets better, your Honor or worse, depending on your way of looking at it. Remember that web casting that's been bandied about during the course of this case? You know, that's supposedly where your Honor should look for the rationale for the decision, not in the approval letter, but in a

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PROCEEDINGS - GIUFFRA webinar that has been produced in the last recent period. Let's put up 27. That's the now famous Thompson Street Events final transcript -- PX 1287. And, your Honor, what's interesting about this, is that this is Mr. Dinallo, in his own words, and he is being asked about where is the money going to go and is there some possibility of getting Federal funds, and he says, quote, where would the TARP money go?" By the way, parenthetically, TARP was shut down by then. They couldn't qualify the TARP. Then he says, if the answer is we will go to the holding company, then that's completely about the public shareholders, close quote. Further on, he said, quote, and if it's going to the operating company, that's about the policyholders." So, Mr. Dinallo knew the distinction. He knew if it went to the operating company, if the money stayed in the operating company, it's about the policyholders. He knew if the money went to the holding company, then that's completely about the public shareholders, and again, I keep beating this drum, this time it's banks. Next time it could be homeowners, next time it could be, you know, injured people because of some company that has a bad product, and they go bankrupt, and have to try to get insurance from an insurance company.

PROCEEDINGS - GIUFFRA THE COURT: Counsel, could you come up so I could talk you to you briefly, the three of you? We are finished for today. Hope everybody has a very nice weekend and we will see you Monday morning. (Whereupon, the case stood in recess to Monday, June 4, 2012 at 10 A.M.)

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PROCEEDINGS - GIUFFRA So, the principles in the case cut across the law of insurance in this State. It's not just, as the other side would like you to believe, banks, banks, banks, banks, banks. That's what you will hear. That's what you have heard -- just slogans and ad hominem. I want to focus on facts and law. What does Mr. Dinallo say? He says, quote, and there has been reason no showing at the moment probably that those policyholders absolutely need it. In fact, I am only almost certain that all proposals have it going to the holding company, close quote. That's what Mr. Dinallo is saying in April 2009. So much, your Honor, for him trying to get Federal funding so it's going to go to the policyholders. That's what Mr. Dinallo is saying, and this is a document that the other side put up. But, if you read the whole document and you don't just provide a cropped picture, Mr. Dinallo himself is saying, quote, I am only certain, almost certain that all proposals have it going to the holding company," and Mr. Dinallo himself says, "if it goes to the holding company, it's completely about the public shareholders." Your Honor, it's a Friday. I think we will end right here. Thank you very much.

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