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MBIA may face new inquiry
WSJ: Reinsurance agreement used to wrongly offset bond losses being probed by U.S. prosecutors.
March 10, 2005: 5:57 AM EST

Federal prosecutors are investigating the reinsurance agreements that MBIA Inc. (MBI) acknowledged earlier this week it had wrongly used in 1998 to offset losses from bonds it had insured, Thursday's Wall Street Journal reported.

The bond insurer's disclosure of a subpoena from the U.S. Attorney's office in Manhattan came one day after the Armonk, N.Y., company said it would restate more than six years of its financial statements. The restatement is tied to its use of the reinsurance agreements to blunt the impact of the bankruptcy of a Pennsylvania hospital chain with insured bonds.

The investigation by federal prosecutors ratchets up the stakes for MBIA, which already faces probes into the transactions by the Securities and Exchange Commission and New York's attorney general. In a one-paragraph statement released after the market closed, MBIA said it intends to cooperate fully with the U.S. Attorney's office, as it is with the other authorities.

The SEC and New York Attorney General Eliot Spitzer are pursuing a broad investigation into nontraditional insurance arrangements that in some cases can be used to manipulate buyers' financial statements. At least a half-dozen other insurers have disclosed receiving subpoenas from the SEC and Mr. Spitzer's office. MBIA now joins a smaller group that is facing Justice Department scrutiny over specific transactions. Those transactions include an agreement between Berkshire Hathaway Inc.'s (BRKA BRKB) General Re Corp. and American International Group Inc. (AIG).

MBIA provided no details beyond those it gave Tuesday when announcing the restatement. Then, it said it wrongly had used $70 million of reinsurance proceeds in offsetting the $170 million loss it expected as the Allegheny Health, Education and Research Foundation, the Pennsylvania hospital chain, was poised to default on $265 million of bonds insured by MBIA. Reinsurance amounts to insurance for insurance companies, and is used to spread the risk from insurance policies to other companies.

-Wall Street Journal Staff Reporter Theo Francis contributed to this article. Dow Jones Newswires 03-10-05 0459ET Copyright (C) 2005 Dow Jones & Company, Inc. All Rights Reserved.  Top of page


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