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Aurelius Capital settles $241 billion lawsuit over MBIA restructuring

A major lawsuit challenging bond insurer MBIA's 2009 restructuring ended this week with both parties agreeing to dismiss the case.   

The plaintiff in the case, Aurelius Capital, sued MBIA (MBI) alleging the insurer restructured its business in 2009 using $5.4 billion in assets to create a separate company, thereby shielding itself from claims on insured mortgage bonds and other deals. 

In its complaint, Aurelius, a policyholder that invested in bonds insured by MBIA, said Aurelius, as well as Fir Tree Value Master Fund, had commercial mortgage-backed securities, residential mortgage-backed securities and other structured finance deals insured by MBIA prior to the insurer's restructuring. The parties assessed the net par value of all these insurance contracts at $241 billion. 

Aurelius claimed the restructuring created a separate MBIA with no exposure to the insured bonds. Meanwhile, Aurelius said policyholders with bonds already insured were left with "a moribund and insolvent MBIA Insurance company left largely with guaranty exposures to toxic securities and instruments and no prospect of writing new business." 

Court records from a New York federal court show both parties agreeing to end the case this week. Terms of the deal were not disclosed. However, court records say both parties agreed to pay their own court fees and costs. 

"The settlement of this case is another important step toward resolving all of the litigation contesting our transformation," said Kevin Brown, a spokesperson for MBIA. 

Aurelius is not the only firm to challenge MBIA on this point. Early on, big banks filed a complaint against MBIA over the restructuring, but many of those firms began to drop out of the case last year. There are only three banks left in that lawsuit: BofA/Merrill Lynch (BAC), Natixis, Societe Generale.

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