Bond insurer MBIA Inc. is suing Merrill Lynch to cancel $5.7 billion worth of loss-ridden credit default swap contracts, and said it will seek compensation for payments it made to other counterparties.
The credit default swaps guarantee losses on subprime mortgages, and MBIA said Merrill Lynch had a "deliberate strategy" to offload billions of dollars in deteriorating U.S. subprime residential mortgages by packaging them into collateralized debt obligations or hedging their exposure through swaps guaranteed by insurers like MBIA.
Based upon Merrill Lynch's alleged misrepresentation, MBIA and two units insured billions of dollars for the credit default swaps on the super-senior and senior tranches of four CDOs.
As a result, MBIA said it faces losses from the four CDOs in excess of several hundred million dollars.
"Today's action is consistent with our intention to pursue all available remedies against those parties whose improper actions have directly resulted in substantial losses for MBIA and its shareholders," said MBIA Chief Executive Jay Brown.
A representative with Merrill Lynch, which was acquired by banking giant Bank of America Corp. amid the financial meltdown, wasn't immediately available for comment.
The suit, filed Thursday in the Supreme Court of New York, is seeking to void the policies and credit default swaps and recover damages for MBIA's losses where the contracts and related policies were issued to third-party counterparties other than Merrill Lynch.
MBIA's shares were inactive in after-hours trading at $4.73. Its stock has lost nearly three-quarters of its value from its 52-week high in September.