8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 25, 2007

MBIA INC.

(Exact name of registrant as specified in its charter)

Connecticut	1-9583	06-1185706
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

113 King Street, Armonk, New York	10504
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

914-273-4545

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01. Entry into a Material Definitive Agreement.

On January 29, 2007, MBIA Inc. (“MBIA”) issued a press release announcing that MBIA and its principal operating subsidiary MBIA Insurance Corporation (together with MBIA, the “Company”) have concluded civil settlements with the Securities and Exchange Commission (“SEC”), the New York State Attorney General’s Office (“NYAG”), and the New York State Insurance Department (“NYSID”) with respect to transactions entered into by the Company in 1998 following defaults on insured bonds issued by the Allegheny Health, Education and Research Foundation. A copy of the press release is attached as Exhibit 99.1 to this Form 8-K.

The terms of the settlements, under which the Company neither admits nor denies wrongdoing, include:

• A restatement, which was completed and reported in MBIA’s third quarter 2005 earnings release, of the Company’s GAAP and statutory financial results for 1998 and subsequent years related to the agreements with AXA Re Finance S.A. and Muenchener Rueckversicherungs-Gesellshaft;

• Payment of penalties and disgorgement totaling $75 million, of which $60 million will be distributed to MBIA shareholders pursuant to the Fair Fund provisions of the Sarbanes-Oxley Act of 2002 and $15 million will be paid to the State of New York. MBIA accounted for the $75 million in penalties and disgorgement as a charge in the third quarter of 2005;

• The Company’s consent to a cease and desist order with respect to future violations of securities laws;

• A report by the Company’s independent auditors, PricewaterhouseCoopers, to MBIA’s Board of Directors, the SEC staff, the NYAG and the NYSID concerning the Company’s accounting for and disclosure of advisory fees and the assets of certain conduits; and

• Retention of an Independent Consultant to review and report to the SEC, the NYAG and the NYSID on the evaluation previously undertaken at the direction of the Audit Committee of MBIA’s Board of Directors by Promontory Financial Group LLC of the Company’s controls, policies and procedures with respect to compliance, internal audit, governance, risk management and records management; the Company’s implementation of Promontory’s recommendations; the Company’s accounting for and disclosure of its investment in Capital Asset Holdings GP, Inc.; and the Company’s accounting for and disclosure of its exposure to the US Airways 1998-1 Repackaging Trust and any other transaction in which the Company paid or acquired all or substantially all of an issue of insured securities other than as a result of a claim under the related policy.

The foregoing summary description of the terms of the settlements are qualified in their entirety by reference to the documents attached hereto as Exhibits 10.82-10.85.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit 10.82	Offer of Settlement of MBIA Inc., dated December 15, 2006.
Exhibit 10.83	Consent of Defendant MBIA Inc. to Final Judgment, filed with the United States District Court for the Southern District of New York on January 29, 2007.
Exhibit 10.84	Assurance of Discontinuance in the matter of the People of the State of New York by the Attorney General of the State of New York against MBIA Inc. and MBIA Insurance Corporation, dated January 25, 2007.
Exhibit 10.85	Stipulation of the State of New York Insurance Department dated January 25, 2007.
Exhibit 99.1	Press Release issued by MBIA Inc. dated January 29, 2007 (furnished but not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and not deemed incorporated by reference in any filing under the Securities Act of 1933, as amended).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

MBIA INC.
By:	/s/ Ram D. Wertheim
	Ram D. Wertheim
	General Counsel

Date: January 31, 2007

EXHIBIT INDEX TO CURRENT REPORT ON FORM 8-K

Dated January 25, 2007

Exhibit 10.82	Offer of Settlement of MBIA Inc., dated December 15, 2006.
Exhibit 10.83	Consent of Defendant MBIA Inc. to Final Judgment, filed with the United States District Court for the Southern District of New York on January 29, 2007.
Exhibit 10.84	Assurance of Discontinuance in the matter of the People of the State of New York by the Attorney General of the State of New York against MBIA Inc. and MBIA Insurance Corporation, dated January 25, 2007.
Exhibit 10.85	Stipulation of the State of New York Insurance Department, dated January 25, 2007.
Exhibit 99.1	Press Release issued by MBIA Inc. dated January 29, 2007 (furnished but not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and not deemed incorporated by reference in any filing under the Securities Act of 1933, as amended).

EX-10.82

Exhibit 10.82

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDING

File No.

In the Matter of   MBIA Inc.,   Respondent. OFFER OF SETTLEMENT OF MBIA INC.

I.

MBIA Inc. (“MBIA” or “Respondent”), pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange Commission (“Commission”) [17 C.F.R. § 201.240(a)], submits this Offer of Settlement (“Offer”) in anticipation of cease-and-desist proceedings to be instituted against it by the Commission, pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”).

II.

This Offer is submitted solely for the purpose of settling these proceedings, with the express understanding that it will not be used in any way in these or any other proceedings, unless the Offer is accepted by the Commission. If the Offer is not accepted by the Commission, the Offer is withdrawn without prejudice to Respondent and shall not become a part of the record in these or any other proceedings, except for the waiver expressed in Section V. with respect to Rule 240(c)(5) of the Commission’s Rules of Practice [17 C.F.R. § 201.240(c)(5)).

III.

On the basis of the foregoing, MBIA hereby:

A. Admits the jurisdiction of the Commission over it and over the matters set forth in the Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 (“Order”);

B. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained in the Order, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, consents to the entry of an Order by the Commission containing the following findings:¹

¹ The findings herein are made pursuant MBIA’s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

SUMMARY

1. This proceeding arises out of a fraudulent transaction that MBIA executed to mask the true financial impact of a massive loss it suffered on its guarantee of municipal bonds. In 1998, MBIA learned that it would have to make good on its guarantee of $256 million of bonds issued by a set of hospitals owned by the Allegheny Health, Education and Research Foundation (“AHERF”), which had defaulted. The default would have resulted in the first quarterly loss in MBIA’s corporate history. To counter the potential negative market reaction, senior MBIA executives devised a scheme to obtain retroactive reinsurance that would cover the entire net present value of the anticipated loss, or about $170 million, for a nominal premium. The effect of the transaction was to offset the entire $170 million loss MBIA recorded on its income statement in the third quarter of 1998 with a roughly equivalent reinsurance recoverable, thus masking the AHERF loss and converting a quarterly loss into a gain. The transaction was a sham.

2. MBIA entered into three purported reinsurance contracts under which the reinsurers agreed to provide retroactive coverage of up to $170 million for the AHERF loss (the “excess of loss” or “reinsurance” contracts). The excess of loss contracts were written as if it was unclear whether the reinsurers would have to provide the full amount of the agreed upon coverage, and MBIA’s files were likewise papered to make this appear to be the case. This purported uncertainty about the extent of the reinsurers’ payout to MBIA was critical to the desired accounting. To the extent that the reinsurers’ payments under the excess of loss contracts were not expected to vary significantly, such payments could not be treated as reinsurance for accounting purposes, and MBIA would not be able to mask the effect of the AHERF loss on its income statement by offsetting the reinsurance recoveries against the loss. In fact, MBIA expected that the reinsurers would be called upon to pay out under the excess of loss contracts.

3. Because the reinsurers expected to pay out under the reinsurance contracts, they protected themselves against loss on the transaction by entering into separate agreements by which MBIA agreed to cede to them future business (the “quota share contracts”). The quota share contracts, which covered a significant percentage of MBIA’s portfolio, ceded to the reinsurers hundreds of millions of dollars in premiums on future business. Although the ceding contracts did not on their face constitute compensation to the reinsurers (because the reinsurers were undertaking some limited risk associated with the ceded premiums), in substance, they were compensation, because the contracts ceded so little risk associated with the amount of premium received. Indeed, in the case of one reinsurer, which had agreed to pay $70 million of MBIA’s AHERF loss, MBA ceded $101 million in net premiums (resenting $13 billion of underlying insurance risk), but then secretly agreed to re-assume all but $13 million of the risk in an oral side agreement, leaving the reinsurer with all the ceded premium and virtually no risk. With respect to the other two reinsurers, which each paid $50 million of the AHERF loss, MBIA ceded a tremendous volume of business based upon a formula that virtually assured that the reinsurers would be repaid in full for their payments under the excess of loss contracts, even taking into account the risk they would be undertaking on the ceded business.

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4. In September 2004, the reinsurer with the oral side agreement sued MBIA to enforce the side agreement. The lawsuit led to an investigation by the Audit Committee of MBIA’s Board of Directors, which concluded, in March 2005, that “it appears likely that such an [oral side] agreement” existed, and resulted in MBIA’s restatement of its consolidated financial statements for the years 1998 through 2003. However, MBIA restated only the $70 million of reinsurance associated with the side agreement. It did not restate the remaining $100 million, which was improperly accounted for and which had been the subject of numerous misleading press releases and periodic filings.

5. As a result of the foregoing conduct, MBIA, directly and indirectly, has engaged, and may again engage, in violations of Sections 17(a) of the Securities Act of 1933 (“Securities Act”), and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder.

RESPONDENT

6. MBIA Inc. is a Connecticut corporation headquartered in Armonk, New York. Through its principal operating subsidiary, MBIA Insurance Corporation (“MBIA Corp.”), the company is a leading financial guarantor and provider of specialized financial services. MBIA Corp. has a financial strength rating of Triple-A from Moody’s Investors Service, Standard & Poor’s Ratings Services, Fitch Ratings, and Rating and Investment Information, Inc. MBIA’s common stock trades on the New York Stock Exchange and it files periodic reports with the Commission pursuant to Section 13 of the Exchange Act.

OTHER RELEVANT ENTITIES

7. AHERF is a nonprofit operator of hospitals in Pennsylvania. In 1996, MBIA guaranteed $256 million of bonds issued by a set of AHERF-owned hospitals known as the Delaware Valley Obligated Group (“AHERF bonds”).

8. Axa Re Finance (“Axa”) is an indirect subsidiary of Axa SA, an insurance group and asset management company headquartered in Paris, France. Axa SA’s American Depository Receipts trade on the New York Stock Exchange under the symbol AXA. One of Axa SA’s primary subsidiaries is Axa Re, which focuses on the property and catastrophe reinsurance business. Axa is a wholly-owned subsidiary of Axa Re that was funned in 1997 to expand Axa Re’s presence in the financial guarantee markets.

9. Muenchener Rueckversicherungs-Gesellschaft AG (“Munich”) is a German corporation whose core businesses are reinsurance, primary insurance and asset management.

10. Zurich Reinsurance (North America), Inc. (“Zurich”), was, at the relevant time, a subsidiary of Zurich Financial Services Group, a Switzerland-based insurance and financial services company. Zurich is now known as Converium Reinsurance (North America) Inc., and is part of Converium Holding AG, an independent international multi-line reinsurer with headquarters in Switzerland.

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MBIA Engaged in a Fraudulent Scheme to Mask the Effect of the AHERF On Its Earnings

11. The AHERF loss was a significant event for MBIA. Not only was it the first sizeable loss in its history, but the loss exceeded MBIA’s unallocated loss reserves by about $100 million and was the subject of intense market concern. MBIA designed the AHERF reinsurance transaction specifically to address the anticipated market reaction by masking the effect of the loss on earnings. Ultimately, MBIA achieved the desired income statement effect by entering into an excess of loss contract and one or more quota share contracts with each of three reinsurers, the key monetary terms of which are summarized below.

Counterparty	Excess of Loss Coverage	Quota Share Contract Gross Premiums
Munich	$50 million	$98 million ($28 million to be paid in fourth quarter 1998)
Axa	$50 million	$97 million ($60 million to be paid by March 31,1999)
Zurich	$70 million	$145 million ($101.5 million net)
Total:	$170 million coverage	$340 million gross ceded premium

12. The quota share contracts were carefully devised to fully compensate the reinsurers for the amounts they expected to pay under the excess of loss contracts. In addition, they were structured and documented so as to pass scrutiny by MBIA’s auditor. Specifically, certain aspects of the quota share contracts were changed or omitted and made the subject of separate, and in some instances secret, side deals.

MBIA’s Business; Writing to a “Zero-Loss” Standard

13. MBIA, primarily through its subsidiary MBIA Corp., is and was at all relevant times, engaged in providing financial guarantee insurance for municipal and other government bonds and for structured finance obligations. Financial guarantee insurance provides an unconditional and irrevocable guarantee of payment, when due, of the principal and interest or other amounts owing on insured obligations. The value of MBIA’s guarantee is dependent on its credit rating, which historically has been Triple-A. That Triple-A rating in turn is dependent on MBIA’s financial condition and its ability to control its losses.

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14. Because MBIA underwrites to a “zero loss” standard, the chance of a loss on account of a default on the issues it guarantees is, by design, typically small. According to MBIA, “[every transaction [the company] look[s] at is structured to a no-loss standard to avoid losses even under the worst probable case scenario.” Therefore, although a loss, even a significant one, was possible, the company operated using a business model that assumed there would be no such losses, and at the relevant time, its history demonstrated that such losses were rare.

The AHERF Loss and Its Effect on MBIA’s Stock Price

15. In 1996, the AHERF bonds were issued, with MBIA’s guarantee. The AHERF bonds were not general obligation bonds backed by tax revenues. By the spring of 1998, it was apparent that AHERF was in financial distress and that MBIA would have to make good on its guarantee. As a result, the investment community was concerned about the possible negative impact on MBIA resulting from its AHERF exposure. This concern was exerting downward pressure on MBIA’s stock price, which fell from a high of $77.94 in April 1998 to a low of $67.62 on June 15, 1998.

16. On July 21,1998, AHERF filed for bankruptcy protection, and MBIA issued a press release stating that the AHERF bankruptcy would have no impact on its earnings because “the company’s unallocated loss reserve [of approximately $75 million] will be sufficient to meet anticipated losses.” The market remained concerned, and MBIA’s stock price continued to fall. On September 2, 1998, AHERF announced that its 1997 financial statements would be restated and should not be relied upon. By September 10, 1998, the price of MBIA’s stock had fallen to $46.30.

17. It was in this context that senior MBIA executives negotiated and executed the excess of loss and quota share contracts, for the purpose of masking the effects of the AHERF loss on MBIA’s earnings and thus allaying the market’s concern. The contracts were negotiated, structured, and documented by MBIA’s then-chief executive officer and chairman of the board (“CEO”) and its then-chief financial officer and later special assistant to the chairman (“CFO”).

18. MBIA first announced a reinsurance solution during an investor call on September 11, 1998, and the news had an immediate positive impact on MBIA’s stock price. By the close of business on September 11, the price had climbed to $52.09 from $46.30 the day before. Ultimately, in a September 29, 1998 press release, MBIA announced that it had obtained $170 million in reinsurance for its anticipated AHERF loss and that as part of the reinsurance agreements it had “entered into strategic business relationships with highly rated reinsurers to provide them with future business.” MBIA did not identify the reinsurers or provide details of the “strategic business relationships.” After the issuance of this press release, and through the filing of MBIA’s third quarter earnings release and Form 10-Q in mid-November, MBIA’s stock price recovered so that by year end it was trading in the mid-60s.

19. The July press release and the September conference call and press release were deliberately or recklessly misleading. When the July release was issued, MBIA’s own internal analysis was that the AHERF loss would likely exceed its unallocated loss reserves. When MBIA announced in the September conference call and the September press release that the loss would be covered by reinsurance, it knew that the excess of loss contracts were not agreements subject to reinsurance accounting but were in substance loans, and that the “strategic business relationships” were mechanisms designed to fully compensate the reinsurers for the amounts they had paid under the excess of loss contracts.

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The Terms of the AHERF “Reinsurance” Arrangement and the Applicable Accounting Principles

20. The essence of the reinsurance arrangement was that Munich, Axa and Zurich each agreed to “reinsure” a portion of the AHERF loss retroactively, i.e., to pay MBIA for a loss that it had already incurred, in return for premiums on future MBIA business. The reinsurance arrangements took the form of excess of loss contracts, which were organized into three layers, with Munich bearing responsibility for the first $50 million of the AHERF loss, Axa responsible for a second $50 million layer, and Zurich responsible for a third $70 million layer. (In an excess of loss reinsurance contract, a reinsurer pays its insured when the insured’s loss is in “excess” of a set amount). In return, MBIA agreed to pay the three insurers a nominal premium for the excess of loss contracts, and agreed to provide the reinsurers with, or “cede,” future business, with total gross premiums of $340 million, under quota share contracts. (In a typical quota share contract, the reinsurer takes on a percentage of risk for a percentage of the premium, minus the expenses of the company providing, or “ceding,” the risk and associated premiums.)

21. To achieve the desired accounting treatment, which would permit MBIA to offset the $170 million AHERF loss with the $170 million reinsurance gain in the third quarter, MBIA knew that the excess of loss contracts had to transfer insurance risk on the date they were agreed upon. The applicable GAAP is Statement of Financial Accounting Standards Number 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts (“FAS 113”). Paragraph 9 of FAS 113 sets out the requirements for transferring insurance risk:

a. The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts[; and]

b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction.

A reinsurer shall not be considered to have assumed significant insurance risk under the reinsured contracts if the probability of a significant variation in either the amount or timing of payments is remote.

22. In addition, even if there had been sufficient variability as to the timing and amount of payments under the excess of loss contracts, to qualify for reinsurance accounting MBIA knew that it also had to be “reasonably possible that the reinsurer[s] [might] realize a significant loss on the transaction.” To make that determination, the reinsurers exposure and compensation on all the applicable agreements had to be considered. FAS 113, according to FASB Staff Implementation Guide on FAS 113, requires that:

[F]eatures of the contract or other contracts or agreements that directly or indirectly compensate the reinsurer or related reinsurers for losses be considered in evaluating whether a particular contract transfers risk. Therefore, if agreements with the reinsurer or related reinsurers, in the aggregate, do not transfer risk, the individual contracts that make up those agreements also would not be considered to transfer risk, regardless of how they are structured. (See ETTF Topic No. D-34, question 13)

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If, as was the case, it was not reasonably possible that the reinsurers would realize a significant loss on the arrangement, the payments under the excess of loss contracts could not be treated as reinsurance but rather would have to be accounted for as deposits.

23. In fact, the AHERF reinsurance arrangement failed the FAS 113 test because MBIA knew that its estimate of the loss was at least the amount of the reinsurance coverage, and each reinsurer expected to pay the full amount of its commitment. That fact alone meant that the arrangement could not be treated as reinsurance, even when combined with the quota share contracts. And because the quota share contracts were designed to compensate the reinsurers for their payments under the excess of loss contracts, it was not reasonably possible that the reinsurers would realize a significant loss on the excess of loss contracts.

MBIA’s Misleading Announcements About the Impact of AHERF

24. On July 20, 1998, just one day before AHERF filed for bankruptcy protection, MBIA’s surveillance department, which was responsible for preparing loss estimates for senior management, prepared a memorandum advising MBIA’s president on reserving alternatives and press strategy regarding AHERF. The memo stated:

We think $95-100MM – half way between the (highly unlikely) best case [of $57 million] and the much more likely worst stress case [of $136 million] is an appropriate starting point. We would expect that it is more likely than not we would have to ratchet the loss estimate up over the estimated two years it will take for the bankruptcy case to play out. On the other hand, the presence of four current bidders may give us a better outcome than currently expected. Accordingly, choosing a half-way number seems like a reasonable course at this point.

25. The president and the CEO rejected the surveillance department’s recommendation for a $95-$100 million reserve. They did so because the figure exceeded MBIA’s unallocated loss reserves, a fact that they did not want to disclose to the market. If MBIA announced its actual estimate of the loss, it would have had to disclose in its Form 10-Q for the second quarter, which was being prepared at the time, that the company expected its loss on AHERF to exceed its unallocated loss reserve.

26. On July 21, MBIA issued a press release, approved by the president and the CEO, which stated that MBIA expected that its unallocated loss reserve (then approximately $75 million) would “be sufficient to meet anticipated losses from the bankruptcy filing,” without any explanation of that conclusion. As a result, according to the release, “the company [did] not expect losses from this insured credit to affect its earnings.”

27. The July 21 press release was false because it implied that MBIA’s exposure on AHERF was less than $75 million, when in fact the company’s own surveillance department was anticipating a loss perhaps as much as $136 million, and was recommending a reserve amount of $95-100 million, fax in excess of $75 million.

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28. On August 4, 1998, MBIA issued its second quarter earnings release. In the release, the CEO was quoted as saying that the company’s unallocated loss reserves “will be adequate to handle the AHERF loss.” This statement was restated essentially verbatim in MBIA’s Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998, in a note on subsequent events meriting mention. This statement was also incorporated in a prospectus MBIA filed on September 28, 1998 in connection with a $150 million debenture offering, and in a later filing. The CEO had no reasonable basis to make such a statement because MBIA had no estimate of loss other than the surveillance department’s suggested reserve of $95-100 million.

29. On September 1, the day before MBIA entered into the excess of loss contracts with Munich and Axe, MBIA senior executives received a briefing on the status of AHERF from the surveillance department. At that briefing, they were told that “[alt expected Ch. 11 auction sales ranges of $500-650 [million], MBIA will suffer a [net present value] loss of $100-150 [million] on [its AHERF bond] exposure of $256 million net.” Thus, by the eve of September 2, 1998, the earliest date by which MBIA claims to have reached agreements in principle to the purported reinsurance agreements with Munich and Axa, MBIA’s loss estimates had climbed to approximately $100-150 million.

30. On September 11, 1998, MBIA held a conference call for the stated purpose of addressing “the sharp and precipitous decline in MBIA’s stock price over the last two weeks.” That call, which had over 250 participants from major investment banks and institutional investors, specifically addressed, among other things, the AHERF situation. On the call, the president and the CEO made several statements about reinsurance the company was in the process of arranging to cover its AHERF exposure, including the following:

• “we have been making arrangements, not yet finalized, in the reinsurance marketplace which at very little cost has the effect of more than doubling the general loss reserve.”

• although the AHERF situation was “fluid,” MBIA “continue[s] to believe that after the arrangements we are making as to reinsurance . . . , the unallocated reserve that we have at present will cover any losses that will be incurred by MBIA as a result of [AHERF.]”

• MBIA “did not believe there would be any earnings impact from [AHERF.]”

31. The statements in paragraph 30 were false because MBIA knew that the excess of loss contracts were not agreements subject to reinsurance accounting but were in substance loans.

32. The statements by MBIA’s senior executives had the desired effect on the market. MBIA’s stock price rose 12.4% over the previous day’s close of $46.30 to $52.03, and remained in the $50s through the end of September.

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The Negotiations with the Reinsurers

33. The quota share contracts ultimately reached with the reinsurers took advantage of the unusually low-risk, high-return nature of the financial guarantee business. MBIA’s business model, based on a “zero loss” underwriting standard, was exceedingly profitable. Historically, most of MBIA’s insureds, such as municipalities, other government entities and private issuers of structured finance obligations, were able to make all principal and interest payments from reliable sources of revenue, such as general tax revenues and private consumer receipts. Moreover, unlike traditional insurance, the entire amount of the premium on most municipal and other government entity guarantee insurance is paid up front, when the policy is written. Thus, in ceding business to the reinsurers, MBIA was in reality ceding an expected profit stream on a low-risk business.

34. Moreover, to make certain that the reinsurers would be reimbursed through the quota share contracts, MBIA agreed to modify its usual ceding commission, which is the amount the ceding insurer (MBIA) typically charges a reinsurer for ceding business. The “ceding commission” is typically a fixed percentage of the gross premium ceded. MBIA’s standard ceding commission was 32.5%; that is, MBIA usually retained 32.5% of the gross premiums it ceded to its reinsurers. But in the quota share contracts with Munich and Axa, MBIA used a sliding scale commission. For both Munich and Axa, MBIA agreed to lower its standard ceding commission from 32.5% to 17.5%, depending on the amount of losses the companies incurred on the risks they assumed. The sliding scale commission was a mechanism to help protect the profit that the reinsurers expected from the quota share contracts.

35. MBIA’s auditor reviewed the Munich and Axa quota share contracts to determine whether it was “reasonably possible that the reinsurer [might] realize a significant loss from the transaction,” when the excess of loss contract was combined with the quota share contract. The auditor advised MBIA senior executives that its quota share contracts with Munich and Axa as initially proposed did not pass the FAS 113 test. As a result, the agreements were changed and certain aspects were made the subject of separate agreements.

The Negotiations with Munich

36. The negotiations with Munich began in late July, 1998. From the beginning, Munich assumed that it would be paying the full $50 million on the excess of loss contract. As a result, the negotiations focused on the quota share contracts and making certain that Munich would be fully reimbursed. Under the initial quota share proposal, MBIA was to cede $98 million in premiums to Munich with a sliding scale commission. MBIA also agreed that the premiums would be ceded on a facultative basis – that is, that Munich could choose from among the business MBIA sought to cede to it, unlike a typical quota share contract in which the contract identifies the types of risk the reinsurer has agreed to accept and the insurer has agreed to cede, but does not allow the reinsurer to reject any risk of the type agreed upon. By having the right to select only the risks it wanted, Munich minimized its risk even further.

37. MBIA’s auditor rejected the initial proposal because “the way it is currently structured there is no reasonable chance that [Munich] would lose money.” The auditor indicated that in order to pass the risk transfer requirements, the premium ceded under the quota share contract with a sliding scale could not be more than $70 million.

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38. Because they knew that $70 million would not be sufficient compensation for Munich, the MBIA senior executives proposed that MBIA and Munich enter into two agreements, the first for $70 million, which the auditor had indicated would pass the FAS 113 test, and a second that ceded $28 million in additional premiums. This second quota share agreement did not have a sliding scale, but provided that all premiums would be paid before the end of 1998. With that feature, the two contracts effectively achieved the objective of providing adequate compensation to Munich. And under the analysis MBIA’s auditor employed, there was virtually no chance that Munich would lose money on the deal.

The Negotiations with Axa

39. MBIA also began to negotiate the quota share contract with Axa in July. By the end of August, Axa expected that it would have to pay at least $30 million of its excess of loss contract. Axa also knew, however, that there was a substantial chance that it may need to pay the full $50 million due under the excess of loss contract.

40. To ensure that Axa would be fully compensated in either event, MBIA and Axa agreed that MBIA would cede $60 million in premiums with a sliding scale commission under the excess of loss contract. Of this $60 million, $23 million was to be ceded by March 30, 1999. In addition, senior MBIA and Axa executives proposed what they referred to as a “gentlemen’s agreement,” which initially had a “springing quota share” feature, as well as a sliding scale commission. Under the “gentlemen’s agreement,” MBIA agreed to cede an additional $37 million in premiums if Axa had to pay more than $30 million on the excess of loss contract

41. The MBIA and Axa senior executives had planned not to memorialize this “gentlemen’s agreement.” However, MBIA’s auditor learned about the “gentlemen’s agreement,” and initially said that the arrangement could be part of the written contract. But after reviewing a draft of the quota share agreement with the “springing” provision included, it said that such a provision could not be part of the written contract

42. Axa and MBIA therefore entered into a quota share contract for $60 million. On that basis, MBIA’s auditor approved reinsurance accounting for the reinsurance arrangement with Axa.

43. MBIA and Axa also entered into the “gentlemen’s agreement” that the auditor had rejected. This oral side agreement provided Axa with an additional $37 million in premiums, also with a sliding scale commission. By the time the agreement was memorialized in December 1998, the “springing” feature was dropped, because it was known that Axa would have to pay the full $50 million under the excess of loss contract. It was also agreed that the entire $37 million was to be ceded by the end of the month. Consequently, of the $97 million in total premiums ceded to Axa, $60 million was to be ceded by March 30, 1999.

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The Announcement of the Reinsurance Solution and Its Impact on Earnings

44. On September 29, 1998, the bankruptcy court conducted an auction of AHERF’s assets. The auction resulted in gross proceeds of $345 million. From this amount, MBIA later claimed that it was able to estimate a $170 million net loss on AHERF. Also on September 29, MBIA issued a press release entitled “MBIA Announces Exposure to Bankrupt Pennsylvania Hospital, Group to be Covered by Reinsurance Agreements; Expects no Impact on Earnings.” In the press release, MBIA announced that it had “obtained $170 million of reinsurance that it expects will cover anticipated losses arising from [AHERF].”

45. The September 29 release was false. On September 2, the earliest date by which MBIA claims to have reached agreements in principle with Munich and Axa for excess of loss coverage on the first $100 million of its AHERF exposure, MBIA and the reinsurers knew that the best estimate of MBIA’s loss was at least $95 to $100 million. Because there was no uncertainty as to the amount the reinsurers would pay, the excess of loss contracts did not transfer any risk under FAS 113. Moreover, the reinsurers expected to be fully compensated for their payouts, which also precluded reinsurance accounting under FAS 113.

The Trouble with Zurich and the Secret Side Agreement

46. After MBIA issued the September 29 press release, the purported deal between MBIA and Zurich collapsed as a result of issues raised by MBIA’s auditor. This ultimately led to significant changes in the written contracts, and to the secret side agreement between Axa and MBIA relating to Zurich.

47. The negotiations with Zurich began in August. By September 28, Zurich and MBIA had exchanged a draft that provided both excess of loss coverage on AHERF and a quota share feature. The most prominent feature of the initial draft was that the agreement limited Zurich’s exposure by capping its losses on the quota share contract.

48. By mid–to–late October, MBIA’s auditor advised that for the company to obtain the desired accounting treatment, the caps on Zurich’s losses on the quota share had to be removed. However, MBIA senior executives knew that Zurich would not accept more risk.

49. Thus, by that time, there was no Zurich deal, However, in its September 29 press release, MBIA had already told the market that it had three reinsurers lined up to reimburse it for losses relating to AHERF. Accordingly, the CFO, with the CEO’s knowledge and approval, set about salvaging the Zurich layer of the excess of loss by arranging for another reinsurer to assume the bulk of Zurich’s risk on the quota share.

50. As it happened, the unraveling of the Zurich deal coincided with a planned gathering for MBIA and Axa senior executives at a resort in Portugal, which occurred from October 26 through 28. The CEO and CFO attended for MBIA, and Axa’s CEO and Chief Operating Officer attended along with its chairman, who was also the chairman and CEO of Axa’s parent company.

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51. In Portugal, the CFO approached Axa about assuming Zurich’s risk under the quota share contract for a nominal premium. Axa said it would only do so if another reinsurer could be found to relieve it of that risk as it built on Axa’s books, because even if the chance of paying out on those risks was low, Axa would be required to post reserves against the potential risk. During or shortly after the Portugal trip, the CFO and CEO assured Axa that MBIA would relieve Axa of the risk it had agreed to take on from Zurich. This side agreement was not reduced to writing and was not disclosed to MBIA’s auditor.

52. In addition to the side agreement, Axa’s agreement to take on Zurich’s risk under the quota share contract resulted in three additional agreements because Zurich’s payment under the excess of loss contract was to be funded by Interpolis Reinsurance Services, Ltd., a Dutch reinsurer. In exchange, Zurich gave to Interpolis the bulk of premiums it received from MBIA under the quota share contract, and Interpolis agreed to take on Zurich’s risk from $13 million to $163 million. Axa took on this entire risk from Interpolis, through two separate agreements, one covering the risk from $13 million to $88 million, and the second covering the risk from $88 million to $163 million. In addition, Axa entered into a contract with Zurich under which it assumed Zurich’s risk above $163 million. In return, Axa received $1 million in premium for each agreement, for a total of $3 million. In other words, Zurich and Interpolis retained $99 million in net premiums and retained only $13 million of the risk associated with those premiums, in exchange for the $70 million they provided MBIA to cover for the AHERF loss. Axa, on the other hand, assumed all the risk above $13 million for only $3 million in premium.

53. In short, the Zurich reinsurance arrangement involved limited transfer of risk to Zurich. Under the secret side agreement with MBIA, the risk under the quota share contract was transferred back to MBA, except for $13 million that was more than covered in full by the premiums that Zurich and Interpolis retained. In addition, by the time the deal was reached, there was no uncertainty or variability as to Zurich’s payment under the excess of loss contract, because it was known by then that Zurich would have to pay the fill amount of its commitment.

MBIA Created a Paper Trail to Justify Reinsurance Accounting

54. In order to obtain the auditor’s approval for the desired accounting treatment, MBIA senior executives created a paper trail to justify the reinsurance accounting. This paper trail included several affirmative misrepresentations about the agreements, including but not limited to the following:

(a) First, MBIA represented that its estimate of its AHERF loss on the date on which it reached the reinsurance arrangements with Munich, Axa, and Zurich was less than the amount of excess of loss coverage agreed upon. Specifically, MBIA represented its estimate of loss at the time the reinsurance agreements were reached was $0-$117 million. This representation was false. By September 2, 1998, the earliest date by which MBIA claims the Munich and Axa agreements were purportedly in place, MBIA’s surveillance department had estimated a loss of at least $95-100 million, and possibly as high as $150 million. The representation was also false with regard to Zurich because the deal that was in place in September was not the deal MBIA and Zurich ultimately entered into in October. By the time that deal was entered into, the AHERF loss was known to be at least $170 million.

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(b) Second, the CEO and the CFO provided a letter for the auditor’s files representing that MBIA had “an agreement in principal [sic]” with Zurich, and that “[t]he principal terms were agreed to on September 22nd with the understanding that certain refinements needed to be made to comply with standard reinsurance and accounting practices.” The CEO and CFO each knew when they signed the representation letter that the agreement ultimately reached with Zurich was fundamentally different than the one that was contemplated in September, and they knew that the auditor was unaware of the side agreement in which MBIA effectively agreed to take back all but $13 million of the risk it had ceded to Zurich under the quota share agreement.

MBIA’s Misleading Statements

55. MBIA recorded the $170 million Munich, Axa, and Zurich agreed to pay under the excess of loss contracts as a receivable in the third quarter of 1998, and its consolidated financial statements for the third quarter of 1998 and for the 1998 fiscal year included the entire amount as income.

56. In its November 3, 1998 earnings release, the company stated: “MBIA expects that any anticipated losses arising from [its AHERF exposure] will be fully covered by reinsurance. As a result, the company’s third quarter earnings have not been affected by the bankruptcy.” The release was filed on Form 8-K on November 4.

57. In its Form 10-Q for the quarter ended September 30, 1998, which was filed on November 16, 1998, MBIA stated that it had recorded “$198 million of reinsurance recoverables” for the AHERF loss, which included the $170 million receivable from Munich, Axa, and Zurich.

58. The recoverable under the purported reinsurance contracts, net of the nominal premium on those contracts, thus offset virtually the entire reported AHERF loss, which was recorded as an expense for the quarter. As a result, MBIA reported net income of approximately $100 million for the third quarter and $432 million for the year ended December 31, 1998, and diluted earnings per share of $1.08 and $432 for the respective periods.

59. MBIA’s financial statements and the above-quoted representations in its releases and filings were false and misleading because it was improper to recognize the $170 million as income and because MBIA did not disclose material facts that would have given the true picture of the transaction.

60. MBIA made these representations despite the fact that the CEO and CFO knew, or recklessly disregarded, that reinsurance accounting for the AHERF reinsurance arrangement was improper because there was no risk transfer under the excess of loss agreements and the reinsurers expected to be fully compensated for their payments under the excess of loss contracts by the quota share arrangements.

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61. The AHERF reinsurance arrangement had a material and substantial impact on MBIA’s reported earnings. Had the transaction been accounted for properly, as a financing, the $170 million receivable under the excess of loss contracts would not have been reported as income in 1998. The income statement effect was substantial: it would have resulted in at least $100 million less pre-tax income for the full year 1998 and, in the third quarter, would have resulted in MBIA’s first quarterly loss. As a result of its fraudulent accounting for the recovery under the excess of loss contracts, MBIA was able to report that it “continu[ed] [its] unbroken streak of double-digit increases since [it] became a public company in 1987,” as the company touted in its Annual Report for 1998.

MBIA Continued to Misrepresent Its Results for 1998

62. MBIA’s misleading financial results for the 1998 third-quarter and fiscal year were republished in subsequent filings made in 1999, 2000, and 2001 and continued to create the false impression that the company had an uninterrupted succession of profitable quarters. Those filings continued to conceal the true facts about the purported reinsurance recovery on AHERF, including the side agreement between MBIA and Axa.

63. It was not until March 2005, after Axa filed suit in France, that MBIA publicly acknowledged the side agreement and the effect of it on its reported results for 1998. In March 2005, MBIA restated its consolidated financial statements for the calendar years 1998 through 2003 in light of the conclusion reached in the course of the internal investigation that the existence of a side agreement “appear[s] likely.” The effect on the company’s consolidated income statement for the third quarter of 1998 and fiscal year 1998 was to reverse the $70 million gain attributable to the reinsurance receivable under the excess of loss contract with Zurich, which originally had offset part of the $170 million AHERF loss. MBIA also reversed the expense for the $102 million in net premiums it had ceded to Zurich, which it then recognized as income over a six-year period beginning in 1999. In addition, the company eliminated the $70 million receivable from Zurich originally reflected on its September 30,1998 balance sheet.

64. The company did not restate its accounting for the other $100 million of reinsurance, which was improper.

VIOLATIONS

65. As a result of the conduct described above, MBIA violated Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer or sale of securities. MBIA made material misstatements and omitted material facts concerning the AHERF transaction in connection with its September 1998 debenture offering.

66. As a result of the conduct described above, MBIA violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities. MBIA improperly recognized the $170 million it received under the excess of loss contracts as income and did not disclose material facts concerning the AHERF transaction in its periodic filings that would have given the true picture of the transaction.

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67. As a result of the conduct described above, MBIA violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, which require issuers to file true, accurate, and complete periodic reports with the Commission. Because of its misstatements and omissions of material facts concerning the AHERF transaction, MBIA filed false periodic reports and earnings releases with the Commission.

68. As a result of the conduct described above, MBIA violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their assets. Because MBIA improperly recorded the excess of loss and quota share contracts, its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets.

69. As a result of the conduct described above, MBIA violated Section 13(b)(2)(B) of the Exchange Act and Rule 13b2-1 thereunder, which require all reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and prohibit them from, directly or indirectly, falsifying or causing to be falsified, any book, record, or account MBIA’s internal controls were not sufficient to prevent numerous false accounting entries related to the AHERF reinsurance agreements to be recorded that were not in accordance with generally accepted accounting principles.

UNDERTAKINGS MBIA

MBIA undertakes to:

70. Cooperate fully with the Commission in any and all respects relating to or arising from the matters described in the Offer. In connection with such cooperation, MBIA undertakes to:

(a) produce, without service of a notice or subpoena, any and all documents and other information requested by the Commission’s staff (“Staff”);

(b) be interviewed by the Staff at such times as the Staff reasonably may direct;

(c) upon the request of the Staff; waive any applicable privilege with respect to MBIA’s internal investigation concerning the matters addressed in this Order;

(d) appear and testify truthfully and completely without service of a notice or subpoena as may be requested by the Staff;

71. Independent Consultant. In accordance with the procedure specified in subparagraph 71(k) below, retain, pay for, and enter into an agreement with an independent consultant, not unacceptable to the Staff (“Independent Consultant”), to conduct a comprehensive review of the areas specified in subparagraphs (a) and (b) below, and to make recommendations to MBIA’s Board of Directors, after consultation with the Staff, regarding best practices in these areas. The agreement with the Independent Consultant shall contain the following provisions:

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(a) The Independent Consultant shall review:

(i) MBIA’s accounting for, and disclosures concerning, its investment in Capital Asset Holdings GP, Inc., and

(ii) MBIA’s accounting for, and disclosures concerning, its exposure on notes issued by the US Airways 1998-1 Repackaging Trust.

(b) The Independent Consultant shall also review the design of the review conducted on behalf of the Audit Committee of MBIA’s Board of Directors by Promontory Financial Group LLC, of MBIA’s compliance organization and monitoring systems, internal audit functions, governance process and other controls including risk management, and records management policies and procedures (“Audit Committee Review”), and the implementation of any recommendations by Promontory.

(c) The Independent Consultant shall issue a report to the Staff and MBIA’s Board of Directors within six months of appointment, setting forth:

(i) with respect to the items identified at subparagraph 71(a) above, his or her findings on whether MBIA acted in a manner consistent with generally accepted accounting principles (“GAAP”) and the federal securities laws. With respect to any matter as to which he or she concludes that MBIA acted in a manner inconsistent with GAAP or the federal securities laws, he or she shall propose a plan of review designed to evaluate similar transactions or occurrences, if any, and provide reasonable assurance that all similar conduct inconsistent with GAAP or the federal securities laws has been identified and corrected; and

(ii) with respect to the matters identified at subparagraph 71(b) above, his or her findings concerning whether the Audit Committee’s Review was reasonably designed and implemented and, if not, any recommendations for further review to determine what policies and procedures should be implemented to achieve best practices.

The Report shall also include a description of the review performed, the conclusions reached, the Independent Consultant’s recommendations for any changes in or improvements to MBIA’s policies and procedures necessary to conform to best practices and a procedure for implementing the recommended changes in or improvements to MBIA’s policies and procedures.

Terms of Independent Consultant’s Retention

(d) In addition to the report identified above, the Independent Consultant shall provide the Staff and the Board of Directors with such documents or other information concerning the areas identified in subparagraphs 71(a) and (b), above, as any of them may request during the pendency or at the conclusion of the review.

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(e) The Independent Consultant shall have reasonable access to all of MBIA’s books and records, and the ability to meet privately with MBIA personnel. MBIA may not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing the Independent Consultant with contemporaneous documents or other information related to the matters that are the subject of the review. MBIA shall cooperate with the Independent Consultant, by, among other things, making available to the Independent Consultant the results of the investigation of Capital Asset conducted in 1999 by outside counsel at the direction of the Audit Committee of MBIA’s Board of Directors. The Independent Consultant may consider and use the results of such prior investigation to the extent he or she deems appropriate in the course of conducting his or her own review. MBIA shall instruct and otherwise encourage its officers, directors, and employees to cooperate fully with the review conducted by the Independent Consultant, and inform its officers, directors, and employees that failure to cooperate with the review will be grounds for dismissal, other disciplinary actions, or other appropriate actions.

(f) The Independent Consultant shall have the right, as reasonable and necessary in his or her judgment, to retain, at MBIA’s expense, attorneys, accountants, and other persons or films, other than officers, directors, or employees of MBIA, to assist in the discharge of his or her obligations under these Undertakings. MBIA shall pay all reasonable fees and expenses of any persons or firms retained by the Independent Consultant.

(g) The Independent Consultant shall make and keep notes of interviews conducted, and keep a copy of documents gathered, in connection with the performance of his or her responsibilities, and require all persons and firms retained to assist the Independent Consultant to do so as well.

(h) As to the Commission and its Staff, the Independent Consultant’s relationship with MBIA shall not be treated as one between an attorney and client. The Independent Consultant will not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing any information obtained in the review sought by the Staff.

(i) If the Independent Consultant determines that he or she has a conflict with respect to a one or more of the areas described in paragraph 71 or otherwise, the responsibilities with respect to that subject shall be delegated to a person selected pursuant to the procedures set forth in subparagraph 71(k) below.

(j) For the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with MBIA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such; and shall require that any firm with which the Independent Consultant is affiliated or of which the Independent Consultant is a member, and any person engaged to assist the Independent Consultant in performance of the Independent Consultant’s duties under this Order not, without prior written consent of the Staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with MBIA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. For the purposes of this section, representation of a person or firm insured by MBIA shall not be deemed a professional relationship with MBIA.

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MBIA Obligations Relating to the Independent Consultant

(k) Within twenty days of the date of entry of this Order, MBIA will submit to the Staff a proposal setting forth the identity, qualifications, and proposed terms of retention of the Independent Consultant. The Independent Consultant’s compensation and expenses shall be borne exclusively by MBIA, and shall not be deducted from any amount due under the provisions of this Order. After consultation and coordination with the New York Attorney’s Office and the New York Insurance Department, the Staff, within thirty days of such notice, will either (a) approve MBIA’s choice of Independent Consultant and proposed terms of retention or (b) require MBIA to propose an alternative Independent Consultant and/or revised proposed terms of retention within fifteen days. This process will continue, as necessary, until MBIA has selected an Independent Consultant on retention terms that are not unacceptable to the Staff (and the New York Attorney’s Office and the New York Insurance Department).

(l) MBIA shall adopt all recommendations contained in the report of the Independent Consultant referred to in subparagraph 71(c), above; provided, however, that within fifteen days of receipt of the report, MBIA shall in writing advise the Independent Consultant and the Staff of any recommendations that it considers to be unnecessary or inappropriate. With respect to any recommendation that MBIA considers unnecessary or inappropriate, MBIA need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose.

(m) As to any recommendation with which MBIA and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement within thirty days of the issuance of the Independent Consultant’s report referred to in subparagraph 71(c), above. In the event MBIA and the Independent Consultant are unable to agree on an alternative proposal, MBIA will abide by the determinations of the Independent Consultant.

(n) MBIA, including the board of directors and committees of the board of directors of MBIA, shall not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing any documents, information, or testimony requested by the Staff related to the review conducted by the Independent Consultant.

(o) MBIA shall retain the Independent Consultant for a period of nine months from the date of appointment. The Staff or MBIA may in either’s discretion extend the Independent Consultant’s term of appointment.

(p) Within ninety days of the receipt of the report referred to in subparagraph (c), MBIA shall certify to the Staff that all procedures recommended in the Independent Consultant’s report, and any additional or alternative procedures agreed upon as a result of the procedure set out in subparagraphs 71(l) and (m), have been implemented, or will be implemented on a schedule agreed to by the Independent Consultant, and set out in the certification.

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(q) With respect to any procedures to be implemented on a schedule agreed to by the Independent Consultant but not yet implemented by the date of the certification required pursuant to subparagraph 7l (p), MBIA shall certify to the Staff within ten days after the end of the schedule agreed to by the Independent Consultant that all such procedures have been implemented.

Accountants’ Report

(r) MBIA shall engage certified public accountants, which may be MBIA’s usual public accounting firm, to: (a) review whether MBIA acted in a manner consistent with GAAP and the federal securities laws in its accounting for, and disclosures concerning: (i) advisory fees, and (ii) the assets within Triple A One Funding, LLC, Polaris Funding Company LLC, and Meridian Funding Company, LLC; and (b) provide a written report of its review and conclusions to the Staff within sixty days of the entry of this Order (“Accountants’ Report”).

Miscellaneous Provisions

(s) MBIA shall, at the Staff’s discretion, (a) expand the scope of the Independent Consultant’s engagement to include (i) the review of similar transactions or occurrences referred to at subparagraph 71(c)(i) above, or (ii) following the Staff’s review of the Accountants’ Report, MBIA’s accounting for, and disclosures concerning: advisory fees, or the assets within Triple A One Funding, LLC, Polaris Funding Company LLC, and Meridian Funding Company, LLC.; and (b) extend any of the deadlines set out in this paragraph 71.

72. Pay the expenses, if any, for the distribution of any Fair Fund established pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002 in the related civil action captioned Securities and Exchange Commission v. MBIA Inc., 06 Civ.              (S.D.N.Y.).

73. Restate its financial statements in a manner not inconsistent with this Offer.

74. In determining whether to accept the Offer, the Commission has considered the above undertakings.

IV.

On the basis of the foregoing, MBIA hereby consents to the entry of an Order by the Commission that:

A. MBIA cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a),13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder.

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B. MBIA shall comply with the undertakings enumerated in Paragraphs 71 and 72 above.

V.

By submitting this Offer, MBIA hereby acknowledges its waiver of those rights specified in Rules 240(c)(4) and (5) [17 C.F.R. §201.240(c)(4) and (5)] of the Commission’s Rules of Practice. MBIA also hereby waives service of the Order.

VI.

MBIA understands and agrees to comply with the Commission’s policy “not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings” (17 C.F.R. §202.5(e)). In compliance with this policy, MBIA agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in the Order or creating the impression that the Order is without factual basis; and (ii) that upon the filing of this Offer of Settlement, MBIA hereby withdraws any papers previously filed in this proceeding to the extent that they deny, directly or indirectly, any finding in the Order. If MBIA breaches this agreement, the Division of Enforcement may petition the Commission to vacate the Order and restore this proceeding to its active docket. Nothing in this provision affects MBIA’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

VII.

Consistent with the provisions of 17 C.F.R. § 202.5(f), MBIA waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein.

VIII.

MBIA hereby waives any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement of attorney’s fees or other fees, expenses, or costs expended by MBIA to defend against this action. For these purposes, MBIA agrees that it is not the prevailing party in this action since the parties have reached a good faith settlement.

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IX

MBIA states that it has read and understands the foregoing Offer, that this Offer is made voluntarily, and that no promises, offers, threats, or inducements of any kind or nature whatsoever have been made by the Commission or any member, officer, employee, agent, or representative of the Commission in consideration of this Offer or otherwise to induce it to submit to this Offer.

15th Day of December, 2006	/s/ Ram D. Wertheim
	MBIA Inc.

STATE OF NEW YORK	}
	}	SS:
COUNTY OF WESTCHESTER	}

The foregoing instrument was acknowledged before me this 15 day of December, 2006, by Ram D. Wertheim, who ü is personally known to me or              who has produced a New York driver’s license as identification and who did take an oath.

/s/ Amy Gonch

Notary Public

State of New York

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EX-10.83

Exhibit 10.83

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

  SECURITIES AND EXCHANGE COMMISSION,                                                        Plaintiff,                                       v.   MBIA INC.,                                                        Defendant. : : : : : : : : : : :     07 Civ. 658 (JGK)     CONSENT OF DEFENDANT MBIA INC. TO FINAL JUDGMENT

1. Defendant MBIA Inc. (“MBIA” or “Defendant”) waives service of a summons and the complaint in this action, enters a general appearance, and admits the Court’s jurisdiction over Defendant and over the subject matter of this action.

2. Without admitting or denying the allegations of the complaint (except as to personal and subject matter jurisdiction, which Defendant admits), Defendant hereby consents to the entry of the Final Judgment in the form attached hereto (the “Final Judgment”) and incorporated by reference herein, which, among other things, orders Defendant to pay disgorgement in the amount of $1, and a civil penalty in the amount of $50,000,000 under Section 20(d) of the Securities Act of 1933 and Section 21(d)(3) of the Securities Exchange Act of 1934, which may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.

3. Defendant acknowledges that the civil penalty paid pursuant to the Final Judgment may be distributed pursuant to the Fair Fund Provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. Regardless of whether any such Fair Fund distribution is made, the civil penalty shall be treated as a penalty paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Defendant agrees that it shall not, after offset or reduction of any award of compensatory damages in any Related Investor Action based on Defendant’s payment of disgorgement in

this action, argue that it is entitled to, nor shall it further benefit by, offset or reduction of such compensatory damages award by the amount of any part of Defendant’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, Defendant agrees that it shall, within 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed in this action. For purposes of this paragraph, a “Related Investor Action” means a private damages action brought against Defendant by or on behalf of one or more investors based on substantially the same facts as alleged in the Complaint in this action.

4. Defendant agrees that it shall not seek or accept, directly or indirectly, reimbursement or indemnification from any source, including but not limited to payment made pursuant to any insurance policy, with regard to any civil penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors. Defendant further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors.

5. Defendant waives the entry of findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

6. Defendant waives the right, if any, to a jury trial and to appeal from the entry of the Final Judgment.

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7. Defendant enters into this Consent voluntarily and represents that no threats, offers, promises, or inducements of any kind have been made by the Commission or any member, officer, employee, agent, or representative of the Commission to induce Defendant to enter into this Consent.

8. Defendant agrees that this Consent shall be incorporated into the Final Judgment with the same force and effect as if fully set forth therein.

9. Defendant waives service of the Final Judgment and agrees that entry of the Final Judgment by the Court and filing with the Clerk of the Court will constitute notice to Defendant of its terms and conditions. Defendant further agrees to provide counsel for the Commission, within thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit or declaration stating that Defendant has received and read a copy of the Final Judgment.

10. Consistent with 17 C.F.R. 202.5(f), this Consent resolves only the claims asserted against Defendant in this civil proceeding. Defendant acknowledges that no promise or representation has been made by the Commission or any member, officer, employee, agent, or representative of the Commission with regard to any criminal liability that may have arisen or may arise from the facts underlying this action or immunity from any such criminal liability. Defendant waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein.

11. Defendant understands and agrees to comply with the Commission’s policy “not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint or order for proceedings.” 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant’s: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

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12. Defendant hereby waives any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to pursue reimbursement from the United States, or any agency or any official of the United States acting in his or her official capacity, of attorney’s fees or other fees, expenses, or costs expended by Defendant to defend against this action. For these purposes, Defendant agrees that Defendant is not the prevailing party in this action since the parties have reached a good faith settlement.

13. Defendant agrees that this Court shall retain jurisdiction over this matter for the purpose of enforcing the terms of the Final Judgment.

14. Defendant agrees that the Commission may present the Final Judgment to the Court for signature and entry without further notice.

MBIA INC.
By:	/s/ Ram David Wertheim
	Ram David Wertheim
	General Counsel and Secretary

On Dec. 15, 2006, Ram D. Wertheim, a person known to me, personally appeared before me and acknowledged executing the foregoing Consent with full authority to do so on behalf of MBIA Inc. as its General Counsel & Secretary.

/s/ Amy R. Gonch

Notary Public

Commission expires: 9/6/10

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Approved as to form:

/s/ John H. Hall

John H. Hall

Debevoise & Plimpton LLP

919 Third Avenue

New York, N.Y. 10022

(212) 909-6591

Attorneys for Defendant

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EX-10.84

Exhibit 10.84

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEW YORK

	X
THE PEOPLE OF THE STATE OF NEW YORK,	:
by ELIOT SPITZER, Attorney General of the State of New York,	:	Index No.
Plaintiff,	:
-against-	:
MBIA, INC., MBIA INSURANCE CORPORATION,	:
Defendants.	:
	X

ASSURANCE OF DISCONTINUANCE

PURSUANT TO EXECUTIVE LAW § 63(15)

Pursuant to the provisions of Executive Law § 63(12) and Article 23-A of the General Business Law (the “Martin Act”), Eliot Spitzer, Attorney General of the State of New York caused an investigation to be made of MBIA, Inc., and MBIA Insurance Corporation (collectively “MBIA”) related to MBIA’s scheme to mask the earnings effect of a major loss it suffered when a Pennsylvania hospital chain, Allegheny Health, Education and Research Foundation (“AHERF”) defaulted on $256 million of bonds MBIA had insured (the “Attorney General’s Investigation”); and the Superintendent of Insurance of the State of New York (the “Superintendent”), pursuant to Insurance Law Section 309, conducted an examination of MBIA (the “Examination”) and issued a Report on Examination as of December 31, 2003, dated September 21, 2005 (“Report on

Examination”). Based upon the Attorney General’s Investigation, and the Superintendent’s Examination, the following findings have been made:

PRELIMINARY STATEMENT

1. MBIA, Inc. through its subsidiary MBIA Insurance Corporation is the leading insurance company in the business of providing financial guarantees for bond issuers such as states and municipalities. Through these guarantees, MBIA assures purchasers of a given bond that the bond’s issuer will make its interest and principal payments on time. This makes the bond more attractive as an investment because the investor has MBIA, with a Triple-A credit rating, as a backstop in case the bond issuer defaults on its obligations. MBIA receives fees called premiums from the issuer in return for such a guarantee.

2. MBIA holds itself out to the investing public as a company that does not risk significant losses on the insurance it writes. It prides itself on its ability to choose bonds for its guarantees that will not default — what it calls in its most recent annual report “top quality risk management with a no-loss underwriting standard.” (MBIA 2004 Annual Report at 7).¹ Pursuant to this “no-loss” standard, MBIA has held itself out to the public as an insurance company that will be unaffected by major losses.

3. The apparent success of this strategy has led to consecutive years of double digit earnings and a steadily rising stock price. As MBIA declared in its 1998 annual report: “This conservative approach has paid off for our shareholders with

¹ Documents referenced in this Assurance of Discontinuance are appended in a separate volume entitled “Exhibits to Assurance.”

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remarkable consistency. From January 1, 1989 through December 31, 1998, MBIA has produced a 14.2% average return on equity ... MBIA’s market value has increased by a factor of 9, and our core earnings have grown by an average of 15%.” (MBIA 1998 Annual Report at 12). The strategy has continued to work for MBIA to the present day: “This long-term discipline has worked well for MBIA and its shareholders. For the past 5-year period, operating earnings per share have grown 12% on average. . . our 5-year average annual return to shareholders has been 14.04%, compared with a loss of 2.3% for the S&P 500.” (MBIA 2004 Annual Report at 13).

4. In fact, however, MBIA’s winning streak came to an end in 1998, when a Pennsylvania hospital chain named the Allegheny Health, Education and Research Foundation (“AHERF”) defaulted on $256 million of bonds that MBIA had guaranteed. Rather than take a loss that would dwarf any previous loss it had suffered, MBIA entered into a fraudulent scheme to avoid booking the loss. It borrowed the money to cover the AHERF losses then disguised its loan payments as insurance premiums.

5. To carry out the scheme, MBIA’s then Chief Financial Officer, Juiliette S. Tehrani, found three insurance companies willing to enter into “reinsurance” policies with MBIA covering the AHERF exposure. Reinsurance is a term for insurance bought by an insurance company to cover risks on its own books. Since the AHERF bankruptcy had already occurred, however, no rational reinsurer would issue a policy covering MBIA’s loss unless it was certain it would recoup its payments. To obtain the “reinsurance,” MBIA had to agree to pay the three reinsurers back every cent of their money, plus a profit.

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6. Had the investing public been aware of this arrangement, it would have understood that: (1) MBIA had borrowed money to cover a massive loss relating to AHERF; (2) it had agreed to pay the money back; and (3) the AHERF loss properly should be charged to earnings.

7. In late November 1998, after the “reinsurance” contracts were in place, MBIA sent the three reinsurers claims for $170 million, MBIA’s entire exposure on the AHERF transaction, which the reinsurers paid.² In its 1998 financials, MBIA fraudulently treated the $170 million received from the reinsurers as reinsurance payments rather than as loans. As a result, MBIA avoided taking a $170 million charge to its 1998 earnings and its 1998 financials fraudulently overstated net income by approximately 25%.

8. The AHERF fraud created the perception that MBIA had put the AHERF loss behind it without a hit to earnings and led to a recovery in its stock price, which had declined after the AHERF bankruptcy.

9. In 2003, when questions arose about the AHERF loss, MBIA’s response was to state on its website that “MBIA did not have any agreement to reimburse the reinsurers for the loss they paid.” In fact, the only reason the reinsurers agreed to pay the AHERF loss was because such an agreement existed.

² $170 million represents the net present value of MBIA’s obligation to pay interest and principal on the $256 million of bonds.

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10. MBIA also stated misleadingly in a 2003 e-mail to a reporter that: “Th[e] premium [received by the reinsurers on future reinsurance business as repayment for the $170 million loan] was not compensation for the $170 million of stop loss coverage they provided to MBIA but rather they received a premium for the new risk they were assuming.” In 2004, when the same reporter reiterated his questions about the AHERF loss, MBIA’s Executive Chairman Jay Brown observed in an internal e-mail: “clearly the reinsurers entered the [Loss Contracts] because of the premium and the [Repayment Contracts]. To say anything different is inaccurate.” MBIA, however, took no steps to correct the misleading impression created by its 2003 statements.

11. In March of 2005, MBIA restated its books to reflect $70 million of the AHERF transaction as a loan, stating that it appeared likely that MBIA had made an undisclosed “oral agreement” with one of the AHERF “reinsurers.” However, MBIA has yet to reveal to investors the full truth about the AHERF payments and continues to account for the remaining $100 million of the AHERF money as “reinsurance.”

FACTS

I. Background.

12. MBIA is the largest financial guarantor in the world, standing behind billions of dollars in obligations through its subsidiary, MBIA Insurance Corporation. MBIA’s guarantees are a form of insurance. In return for premiums, MBIA agrees to make timely principal and interest payments on an underlying obligation if there is a default. MBIA is able to provide an extremely credible guarantee because it has the highest possible credit rating, Triple-A. Maintenance of its Triple-A rating is critical to MBIA’s business.

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13. MBIA is able to maintain a Triple-A rating partly because of its careful selection of risks. As explained in MBIA’s 1998 annual report, “[w]e have honed our core competency — the management of risk — to a keen edge with one purpose in mind: to protect our Triple-A ratings.” (MBIA 1998 Annual Report at 3). MBIA contrasts itself with other insurance companies that “tolerate higher levels of underwriting risk in the hope of making up losses through greater investment returns.” (MBIA 1998 Annual Report at 10). MBIA continues to emphasize the same theme to the present day, stating in its most recent annual report: “Our orientation is long-term, and we simply won’t compromise our strict no-loss underwriting standards, shirk our commitment to act in the best interests of our shareholders or renege on our pledge to protect our Triple-A ratings for the short-term gratification of top line growth.” (MBIA 2004 Annual Report at 13).

14. Prior to 1998, there were no major defaults on the financial obligations MBIA guaranteed. This changed on July 21, 1998, however, when AHERF, an entity whose bonds MBIA had guaranteed, filed for bankruptcy protection. MBIA had guaranteed $300 million of AHERF’s debt and was liable for making timely principal and interest payments on the debt.

15. On July 20, 1998, the day before AHERF’s bankruptcy filing, MBIA’s Surveillance Department, which was responsible for preparing loss estimates for senior management, prepared a memorandum advising MBIA’s President on reserving

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alternatives and press strategy regarding AHERF. The memo advised MBIA’s President that a reasonable estimate of the AHERF loss was between $95 and $100 million. (MBIA 4994). Despite this estimate, MBIA issued a press release the next day stating that its unallocated loss reserve of $75 million would cover the loss and that it did “not expect losses from this insured credit to affect its earnings.” (MBIA 16094).

16. When it made these assurances to the public, MBIA’s management knew the company faced the prospect of a very large AHERF loss. To avoid taking the loss and consequent charge to 1998 earnings, which would have likely shaken public confidence in MBIA, MBIA decided to enter into a fraudulent scheme to negate the effect of the AHERF loss.

17. The principal element of the scheme was for MBIA to negotiate reinsurance agreements which would cover the AHERF loss. At the direction of MBIA’s then CFO, Julliette S. Tehrani (“Tehrani”), Guy Carpenter & Company, Inc. (“Guy Carpenter”), the reinsurance brokerage arm of Marsh & McLennan Companies, Inc., contacted a number of reinsurers on MBIA’s behalf. Munich Re (Am Re) (“Munich Re”) and Axa Re Finance (“Axa Re”) expressed interest, and MBIA commenced negotiations with them in late July.

18. Through August and September of 1998, Tehrani negotiated agreements to retroactively cover the AHERF loss with Munich Re and Axa Re. The parties reached an agreement in principle at the earliest on September 2, 1998 and the two reinsurers signed slip agreements with MBIA for the first $100 million of coverage

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(Munich covered losses from 0-$50 million; Axa from $50 to $100 million) on September 15 and 21.³ (MR 9788; MBIA 92).

19. On September 1, 1998, the day before MBIA reached agreements in principle with Munich Re and Axa Re, MBIA’s Surveillance Department briefed senior MBIA executives on its estimate of the AHERF loss. It reported that: “[a]t expected Ch. 11 auction sales ranges of $500–650 [million], MBIA will suffer a [net present value] loss of $100–150 [million] on [its AHERF bond] exposure of $256 million net.” (MBIA 97729). Thus, by the day MBIA reached an agreement in principle with Munich Re and Axa Re regarding the purported reinsurance agreements, MBIA’s loss estimates had climbed to approximately $100–150 million.

20. The new estimate demonstrated that the $100 million of coverage secured through Munich Re and Axa Re would not be enough to negate the effect of the AHERF loss. Tehrani therefore sought coverage for an additional $70 million from a third reinsurer, Zurich Reinsurance (North America), Inc. (“Zurich Re”). (MBIA 4342).

21. During the August-September period that Tehrani was arranging the reinsurance facilities, MBIA’s stock declined. Morgan Stanley noted on August 3, 1998: “MBIA shares are under pressure—falling three points on Friday to $67 and off from a high of $81. The chief investor concern seems to be the likely loss on a health care bond issue insured by MBIA.” (MBIA 97554). Merrill Lynch noted on August 4, 1998 that MBIA stock was “down 24% from the peak (versus the S&P 500’s 10% decline from its high)....” (MBIA 97566). By September 10, MBIA’s stock had fallen to approximately $46 per share.

³ A slip agreement is the term used in the insurance industry to describe binding term sheets setting forth the essential terns of the agreements.

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22. On September 11, 1998, MBIA held a conference call for investors and analysts to address “the sharp and precipitous decline in MBIA’s stock price over the last two weeks.” On the call, MBIA’s President and the CEO announced that MBIA was negotiating reinsurance arrangements to cover the AHERF loss without any earnings impact. MBIA’s senior management knew at the time, however, that the arrangements were not reinsurance and were in substance loans. The following day, MBIA’s stock price increased 12.4% over the previous day’s close. MBIA then followed up the conference call with an announcement on September 29, 1998 that it had obtained “$170 million of reinsurance that it expects will cover” the AHERF losses. The announcement further said that as a result MBIA did “not expect exposure to this insured credit to affect its earnings or reduce its unallocated loss reserve.”

23. The September 29^th announcement had a positive effect. The next day, Merrill Lynch published a research report with the title “Allegheny Effect on MBIA Largely Resolved.” (MBIA 25371). The report described the reinsurance facility MBIA had announced as “innovative” and noted that while MBIA’s revelation of a greater than expected loss of $170 million was “a legitimate disappointment,” the loss was “mitigated through the unique reinsurance solution.” (MBIA 25372). The report concluded that “[w]ith the Allegheny-related uncertainty mainly in the past and the company’s earnings reliability intact, MBIA shares offer significant rebound potential.” (MBIA 25371).

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24. In the months after MBIA announced that the AHERF loss was covered by reinsurance, its stock began to rise. By the end of December, the stock had risen by more than 30% compared to its price on September 30, 1998.

II. MBIA deceived the investing public by treating the AHERF transaction as reinsurance.

25. In fact, MBIA’s “unique reinsurance solution” to the AHERF problem was a series of loans disguised as “reinsurance.” MBIA told the investing public on September 29, 1998 that it had “entered into strategic business relationships” with the reinsurers. What MBIA did not tell investors was that these “relationships” amounted to agreements to repay the full $170 million plus interest. The complex arrangement consisted of two dependent parts. First, money flowed to MBIA via a set of “excess of loss” contracts with each of the three reinsurers which provided a total of $170 million in coverage to MBIA, ostensibly in exchange for approximately $3 million in premiums (hereinafter “The Loss Contracts”) (MBIA 8–22; 101–117; 340–351). Second, the money (plus profit) flowed back to the reinsurers over time via $300 million in reinsurance business (hereinafter “The Repayment Contracts”) (MBIA 35–55; 69–87; 129–147; 165–183; 590–602).

26. The Repayment Contracts assured reimbursement to the reinsurers by providing for hundreds of millions of dollars of premiums to reinsure risks that historically had few if any losses. There was virtually no chance that the reinsurers would ever have to pay claims on the Repayment Contracts that approached the amount of premiums they received. The reinsurers made sure of this by conducting detailed cash

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flow analyses that factored in MBIA’s historical loss ratios and the time value of money to assure that the reinsurers would realize a profit (through the Repayment Contracts) on the loans they were extending to MBIA through the Loss Contracts. (MR 8724; MR 9048; TM 0001). The reinsurers also required a number of structural features that ensured compensation, the most prominent of which was a “sliding scale commission” whereby, if there were losses, MBIA would absorb them up to 15% of the premium amount paid under the Repayment Contract. Furthermore, some of the Repayment Contracts had language allowing the reinsurer to pick and choose the risks it would reinsure. (MBIA 72, 133).⁴ The chances that, if there were losses at all, they would exceed the amount of premiums paid by MBIA for this reinsurance were remote.

27. The chronology set forth below shows that MBIA and the reinsurers understood perfectly that the Loss Contracts were loans and that the Repayment Contracts were specifically designed to pay risk-free reimbursement to the reinsurers. Further, in order to ensure that there was no risk transfer whatsoever under these arrangements, in at least two cases MBIA and the reinsurers entered into secret side agreements.

⁴ All the Repayment Contracts had special features designed to ensure the reinsurers would receive full compensation. One of the Repayment Contracts specified that a majority of the premiums paid under the contract should be “upfront premiums” that would be paid in an accelerated fashion. (MBIA 133). A 2000 MBIA e-mail notes that this is “an unusual requirement.” (MBIA 1964). Additionally, as noted in the text above, some of the Repayment Contracts had language allowing the reinsurers to decline to reinsure risks. (MBIA 72,133). In a memo to MBIA dated February 6, 2003, Axa Re stated why these features were added. It said: “To strengthen the reimbursement characteristics of these two SRF Agreements [ the Repayment Contracts], a sliding scale reinsurance commission and the ability by [Axa Re] to individually select each policy to be [paid] to these treaties were introduced in the contracts wordings.” (MBIA 5350).

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A. MBIA’s arrangement with Munich Re

28. To cover the first $50 million of loss from the AHERF bankruptcy, MBIA, acting primarily through Tehrani, sought coverage from Munich Re. Before negotiations with Munich Re began, however, the MBIA team that was monitoring the bankruptcy had told the then President of MBIA, Richard Weill, that a “best case” outcome for MBIA from the bankruptcy would be a loss of at least $57 million and that the most likely loss would be between $95 and $100 million. (MBIA 4994). MBIA’s management thus knew at the outset of negotiations that a $50 million loss at least, was virtually certain.

29. A July 31, 1998 Munich Re internal e-mail reflects that Tehrani and the head of MBIA’s reinsurance operations had informed Munich Re that the loss would be at least $50 million: “MBIA currently expects to incur a loss of $50 million related to this event. However, this loss estimate is very uncertain at this stage and may be quite a lot more.” (MR 8726). Munich Re thereafter assumed it would have to pay $50 million. A September 1, 1998 Munich Re e-mail observed “that in all of our analyses, we have assumed we would incur a $50 million loss up-front. . . .” (MR 0009034).

30. The certainty that there would be a loss of $50 million or more created several problems. The first was that neither Munich Re nor any other reinsurer could be expected to reinsure a certain $50 million loss unless the premiums for such

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insurance approached or exceeded $50 million. Premiums in that amount would defeat MBIA’s purpose of avoiding a $50 million charge to its income statement.

31. To solve this problem, MBIA devised a two-pronged proposal. (MR 8726): (a) MBIA and Munich Re would enter into a Loss Contract obligating it to pay the first $50 million of the AHERF loss in return for a nominal $2 million premium; and (b) simultaneously, MBIA and Munich Re would enter into a Repayment Contract under which MBIA would agree to repay Munich Re under the guise of reinsurance premiums. The transaction was structured to “ensure that [Munich Re] [would be] fully reimbursed for any payments made as a consequence of [the AHERF loss].” (MR 8724).

32. A second obstacle was not so easily solved. MBIA knew that the transaction would have to pass the scrutiny of its accountants, Pricewaterhouse Coopers (“PWC”), who would apply Statement of Financial Accounting Standards (“SFAS”) No. 113, which governs reinsurance contracts, to determine if a transaction can be accounted for as reinsurance. There were two issues related to SFAS No. 113.

33. The first accounting issue related to the Loss Contract and hinged on whether Munich Re would have to pay the full $50 million of coverage to MBIA or whether there was a significant probability that Munich Re could pay less than $50 million. SFAS No. 113 precludes treating a transaction as reinsurance when “the probability of a significant variation in either the amount or timing of the payments by the reinsurer is remote.” (SFAS No. 113 ¶ 9). MBIA had been advised by PWC that unless MBIA could document a loss estimate under $50 million, the transaction would not pass SFAS No. 113’s risk transfer test. (MBIA 111761).

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34. To satisfy PWC, MBIA provided false information about its estimate of loss to PWC in order to create a paper trail which would justify treating the transaction as reinsurance. MBIA’s July 20, 1998 estimate regarding the AHERF loss had been that a “best case” outcome would involve a loss of $57 million and a more likely outcome was a loss of $95 million. By September 1, 1998, MBIA’s loss estimate had climbed to approximately $100–150 million. (MBIA 97729). Ignoring these estimates, MBIA falsely represented to PWC that its estimate of loss from the AHERF bankruptcy was $0 to $117 million. (MBIA 111762).

35. MBIA’s false representation regarding its estimate had the desired effect. Based on MBIA’s misrepresentation, PWC approved treating the Munich Re $50 million Loss Contract as reinsurance in a memorandum dated October 22, 1998. (PWC A0000633). Had MBIA not misrepresented to PWC that its estimate of loss was $0 to 117 million, PWC would have required MBIA to account for the payment as a loan, which could not be used to offset the AHERF loss.

36. The second accounting issue related to the Repayment Contract and hinged on whether the premiums paid under the Repayment Contract would fully compensate Munich Re for its $50 million payment under the Loss Contract. If so, there was a problem: MBIA knew that PWC could not allow it to treat the Loss Contract as reinsurance if Munich Re was fully compensated for its $50 million payment through a separate $98 million Repayment Contract. Paragraph 58 of SFAS No. 113 provides: “[a] contract does not meet the conditions for reinsurance accounting if features of the reinsurance contract or other contracts or agreements directly or indirectly compensate

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the reinsurer or related reinsurers for losses.” (SFAS No. 113, ¶ 58). In reviewing the Munich Re proposal, PWC had concluded that if MBIA paid $98 million in future premiums to Munich Re in exchange for its $50 million payment under the Loss Contract, there would be no reasonable chance that Munich Re would lose money on the transaction and the Loss Contract would not qualify as reinsurance.⁵ (MR 8724).

37. To meet PWC’s concerns, MBIA split the Repayment Contract into two Repayment Contracts — one providing for $70 million in premiums with a sliding scale commission and the second providing for $28 million without a sliding scale commission. This change, which PWC was fully aware of, did not alter the important economics of the transaction, however: Munich Re was getting the same total of $98 million in premiums, an amount that compensated it in full, and there was no reasonable possibility that Munich Re would lose money on the transaction. (MR 9201).

B. MBIA’s arrangement with Axa Re

38. Since MBIA knew from the outset that the likely AHERF loss would be $95 million or more, it knew the $50 million coverage provided by the Munich Re Loss Contract would not be sufficient to cover the loss. Tehrani therefore simultaneously sought an additional $50 million Loss policy from Axa Re, a French reinsurer.

⁵ PWC reached its conclusion by doing a cash flow analysis of the combined contracts which compared the premium revenues that would be received by the reinsurer against its reasonably possible losses. Accountants use this analysis to determine whether a transaction involves enough risk of loss to qualify as reinsurance under SFAS No. 113. If the analysis shows that the total premiums the reinsurer will receive will be greater than the total payments for losses it is reasonably possible it will make, the risk of loss from the transaction is deemed too remote for the transaction to be classified as reinsurance.

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39. Tehrani proposed to Axa Re’s representatives the same two-pronged structure that had been proposed to Munich Re: (a) a $50 million Loss Contract that would carry a nominal premium; and (b) a Repayment Contract that would repay Axa Re under the guise of reinsurance premiums. (MBIA 482-83).

40. Similar to Munich Re, Axa Re calculated that $97 million in premiums on the Repayment Contract would be necessary to compensate it for making the $50 million payment provided for under the Loss Contract. An Axa Re negotiator made this clear in an August 25 e-mail to MBIA concerning a preliminary proposal, which stated: “we want to be compensated fully through the [Repayment Contract payments],” and that if Axa Re had to pay the full $50 million under the Loss Contract, it would “need the full $97m . . . premium to compensate the $50m paid upfront.” (MBIA 494).

41. As it had with Munich Re, Axa Re’s demand for full compensation through $97 million in premiums created an accounting problem for MBIA. If MBIA paid $97 million in future premiums to a reinsurer that provided $50 million in coverage under a Loss Contract, there would be no reasonable chance that the reinsurer would lose money and the transaction would then not qualify as reinsurance under SFAS No. 113’s requirement that a reinsurer cannot be compensated for its losses. To accede to Axa Re’s demand for full compensation would therefore preclude MBIA from treating its arrangement with Axa Re as reinsurance.

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42. To obtain favorable accounting treatment from PWC, MBIA and Axa Re entered into a Repayment Contract ceding only $60 million in premiums to Axa Re while simultaneously entering into a side agreement — which was not reflected in any of the written agreements and therefore presumably would not be part of PWC’s analysis — obligating MBIA to pay to Axa Re an additional $37 million in premiums if Axa Re had to pay $30 million or more under the Loss Contract.

43. The side agreement was temporarily set aside on September 2, 1998, when Tehrani informed Axa Re by e-mail that MBIA had an all-day meeting with its accountants, PWC, and that “we have eliminated the need for side agreements, all agreements will be in the contract.” Tehrani informed Axa Re that MBIA’s broker Guy Carpenter would be faxing new documents reflecting the change. (M 000053).

44. Guy Carpenter faxed Axa Re slip agreements for the Loss and Repayment Contracts with a fax cover page that explained the changes. The fax stated that the slips had been changed based on a revised point of view from MBIA’s auditors and that “no side agreement is necessary based on our current understanding of the rules.” (M 2603). After providing for only $60 million in premiums, the attached Repayment Contract slip incorporated the side agreement Axa Re and MBIA had previously agreed to, stating: “In the event that the amount of reinsurance recoveries under the Company’s [Loss Contract] exceed $30,000,000, the Company agrees to [pay] and [sic] additional $37,000,000 of [premiums].” (M 002616).

45. MBIA’s insertion of the terms of the side agreement into the slip was short-lived. The next day, September 3, 1998, Guy Carpenter faxed revised slips to

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Axa Re removing the provision ceding an additional $37 million in premiums in the event Axa Re had to pay more than $30 million under the Loss Contract. In the fax cover page, Guy Carpenter reported: “As you know, MBIA’s auditor’s [sic] came back again with a need to change the wording of the ... [Repayment Contract] to delete all references to the [Loss Contract].” The fax went on to reassure Axa Re that: “I am certain MBIA will assure you that they will make every effort to ensure AXA Re’s long-term profitability on their overall account at attractive rates of return.” (M 2637).

46. The final slip agreement for Axa Re’s Repayment Contract was signed on September 15, 1998. It provided for only $60 million of future reinsurance business to Axa Re — and contained no reference to paying an additional $37 million if Axa Re paid more than $30 million on the Loss Contract as MBIA assumed it would. (MBIA 121).

47. Although the obligation to provide an additional $37 million in future premiums was not memorialized, MBIA agreed to honor the commitment in an unwritten side agreement.

48. That the side agreement to pay an additional $37 million in premiums survived is shown by a November 24, 1998 e-mail from a broker at Guy Carpenter, which specifically referred to the side agreement. The e-mail stated that an “[MBIA employee] called and the AXA deal where they must pay AXA $67M [sic] and through a side letter an additional $37M has now been triggered. . . . Due to accounting issues they need a separate contract for the payment of the $37M thus can we draw up a slip ASAP . . . based on the Munich RE slip.” (GC 374) (emphasis added).

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49. Other documents also reflect the side agreement. An e-mail dated October 21, 1998 from MBIA’s head of reinsurance operations to Tehrani refers to “the Axa Re ‘Side Agreement.’” (MBIA 1315). Additionally, an Axa Re fax dated October 2, 1998 to rating agencies states that while the MBIA transaction in fact paid $97 million in premiums to Axa Re, only $60 million in premiums would be found in the written slip agreement. The fax explains that the reason the signed agreement would not reflect the actual agreement was “to accommodate MBIA’s FASB 113 requirements.” (M 2508).

50. An MBIA employee sent Axa Re a bill for the full $50 million payable under the Loss Contract in November 1998. (MBIA 15852). On or about December 17, 1998, MBIA honored the side agreement by executing a slip agreement with Axa Re requiring MBIA to pay Axa Re $37 million. (MBIA 127). The agreement facially appeared to be newly negotiated and unrelated to the AHERF transaction or Axa Re’s payment of $50 million.

51. MBIA’s removal of its obligation to pay an additional $37 million from the written agreement with Axa Re and placement of that obligation in an unwritten side agreement enabled the deal to pass the risk transfer analysis PWC subsequently performed. An October 22, 1998 risk transfer memorandum prepared by PWC considers only $60 million of premiums instead of the full $97 million provided for. (PWC A000637). Had the hidden $37 million of premiums been included in PWC’s analysis, the analysis would have demonstrated that it was not reasonably possible for Axa Re to lose money on the combined Loss and Repayment Contracts. The transaction would then have failed SFAS No. 113’s risk transfer test, and PWC could not have permitted MBIA to book Axa Re’s $50 million as a reinsurance payment.

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C. MBIA’s arrangement with Zurich Re

52. The $100 million in coverage provided by Munich Re and Axa Re was not enough to cover what MBIA had come to believe could well be a $170 million loss. In September, therefore, MBIA approached a third reinsurer, Zurich Re, and proposed a two pronged transaction similar to the transactions with Munich Re and Axa Re. MBIA proposed: (a) a $70 million Loss Contract that would carry a nominal premium; and (b) a Repayment Contract that would repay Zurich Re under the guise of reinsurance premiums.

53. Like the other two reinsurers, Zurich Re was unwilling to accept any reinsurance risk. This emerged in a letter from Zurich Re to MBIA’s broker, Guy Carpenter, in which Zurich Re proposed a cap on its potential losses so that they would never exceed the premiums Zurich Re would receive. (CR 315).

54. MBIA agreed to this approach but was forced to abandon it in October when PWC took the position that a cap on Zurich Re’s losses would remove the risk transfer necessary for the contract to qualify as reinsurance. (MBIA 20238; CR 269).

55. Desperate to obtain the $70 million in reinsurance from Zurich Re which MBIA had already publicly announced and which it needed to cover the anticipated $170 million loss from the AHERF bankruptcy, MBIA took a number of drastic steps to give Zurich Re the cap on losses that it wanted without reflecting it in the contract. MBIA’s first step was to induce Axa Re to cover any Zurich Re losses above

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$13 million under the Repayment Contract. (MBIA - IM 19, 29). This would cap Zurich Re’s potential losses as Zurich Re had required. As one memo by MBIA explained, under this arrangement, “[r]isk retention by Zurich Re is minimal.” (MBIA 9215).

56. While the Axa Re reinsurance solved Zurich Re’s problem — it would be receiving more than $100 million in premiums for taking only 9% of the risk under the Repayment Contract — it created a problem for Axa Re, which would be receiving a mere $3 million in premiums for taking on more than 90% of the risk. (MBIA 9215). While the risk of a loss on the Repayment Contracts was extremely low, Axa Re had no economic incentive to take a disproportional amount of risk for a nominal premium. To make the transaction work for Axa Re, MBIA entered into a secret verbal agreement with Axa Re to take back the risk Axa Re was ostensibly assuming. Under this secret agreement, MBIA agreed to replace Axa Re as the reinsurer for Zurich Re within six years.⁶ This made MBIA the ultimate bearer of risk and its own reinsurer.

57. Both the Axa Re reinsurance and the secret agreement to assume Axa Re’s risk were negotiated by Julie Tehrani at a meeting between MBIA and Axa Re in Portugal at the end of October 1998 that was also attended by David Elliott, MBIA’s CEO at the time.⁷ Zurich Re signed a slip providing the final $70 million of coverage a few days later, on November 2, 1998. (MBIA 4342).

⁶ Given the nature of risks at issue in the Repayment Contract, the first six years of coverage were extremely unlikely to yield significant losses.

⁷ Mr. Elliott claims to have no recollection of discussing any business on the trip.

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58. This left MBIA with one more problem. By the time Zurich Re executed the slip agreement, MBIA had known for over a month that the AHERF loss would be $170 million. It therefore knew that: (a) Zurich Re would be paying the $70 million limit provided under the Loss Contract; and (b) the Loss Contract therefore could not qualify as reinsurance because SFAS No. 113 precludes treating an agreement as reinsurance when “the probability of a significant variation in either the amount or timing of the payments by the reinsurer is remote.”

59. To meet this problem, MBIA’s CFO and CEO made a written representation to PWC two days after the Zurich Re slip was executed falsely stating that: (1) MBIA had reached an agreement in principle with Zurich Re six weeks earlier, on September 22, 1998; and (2) “These were binding reinsurance agreements on that date.” In fact, no binding agreement between the parties existed on September 22, 1998. (Cr 00259). As of September 22^nd, Zurich Re had not yet decided or agreed to provide reinsurance to MBIA and did not bind itself to do so until the slip was signed on November 2, 1998. By then, MBIA had known for a month that the AHERF loss would be $170 million and that there would be no possibility of significant variation in the amount or timing of Zurich Re’s payment. Moreover, the agreement reached with Zurich Re in November was materially different than the arrangement the parties had been discussing in September.

60. In 2003, four years after making the secret agreement, MBIA denied to Axa Re that any agreement to reassume Axa Re’s risk existed. Axa Re then sued MBIA in 2004 to enforce the secret agreement at a time when fraudulent insurance

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arrangements had become the subject of increased regulatory scrutiny. MBIA’s Audit Committee ordered an investigation of Axa Re’s allegations. MBIA announced on March 8, 2005, that while it had not “conclusively determined” that the agreement existed, it appeared “likely” that there was a secret agreement with Axa Re. On this basis, MBIA restated its 1998 income reversing the Zurich Re portion of the AHERF reinsurance scheme.

61. The existence of the side agreement was more than “likely.” Its existence is conclusively demonstrated by: (a) contemporaneous notes by an Axa Re employee involved in the deal documenting the side agreement (M 2951); (b) handwritten notes by an MBIA employee attached to MBIA accounting documents confirming the existence of the agreement (MBIA 25445); and (c) an internal MBIA memo dated September 15, 1999 to MBIA’s then CFO, which reported that Axa Re asserted the existence of an “Understanding between [Julie Tehrani] and AXA Re Finance” that “MBIA assumes Zurich Re . . . exposure. . . .” (MBIA 9215).

III. MBIA’s False Statements.

62. The purpose of the convoluted AHERF “reinsurance” transaction was to allow MBIA to mislead investors about its financial condition.

A. MBIA misled investors in 1998 about the impact of AHERF

63. On July 21, 1998, the day after AHERF filed for bankruptcy, MBIA issued a press release which stated that MBIA’s unallocated loss reserve of approximately $75 million would “be sufficient to meet anticipated losses from the

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bankruptcy filing.” The press release went on to state that as a result, “the company [did] not expect losses from this insured credit to affect its earnings.”

64. The July 21 press release was false and misleading. In that one day prior to its issuance, MBIA senior management had received a memorandum estimating the AHERF loss at $95 million and recommending that a loss reserve of $95 million be established. When it issued its July 21^st release, MBIA therefore knew that contrary to what the release stated, the company’s $75 million unallocated reserve would not meet the anticipated AHERF loss, and that the company expected the losses from AHERF to affect its earnings.

65. On September 11, 1998, MBIA held a conference call to address “the sharp and precipitous decline in MBIA’s stock price over the last two weeks.” On the call, which covered a number of issues, the President and the CEO announced that MBIA was negotiating reinsurance arrangements to cover the AHERF loss without any earnings impact. MBIA’s senior management knew at the time, however, that the arrangements were not reinsurance and were in substance loans.

66. On September 29, 1998, MBIA issued another false and misleading press release. The release, entitled “MBIA Announces Exposure to Bankrupt Pennsylvania Hospital Group to be Covered by Reinsurance Agreements; Expects no Impact on Earnings,” announced that MBIA had “obtained $170 million of reinsurance that it expects will cover anticipated losses arising from [AHERF].”

67. The September 29 press release was false in that MBIA had not in fact obtained $170 million in reinsurance to cover the AHERF loss. MBIA’s

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arrangements with Munich Re and Axa Re did not qualify as reinsurance under SFAS No. 113 on multiple grounds. First, they did not meet SFAS No. 113’s requirement that there exist a more than remote possibility of significant variation in the amount the reinsurer would pay. MBIA estimated the AHERF loss at $100–150 million, making it virtually certain that both reinsurers would pay the full $50 million limit of their respective Loss Contracts. Second, the arrangements did not meet SFAS No. 113’s requirement that there exist a reasonable possibility that the reinsurer would realize a significant loss under the overall arrangement. The size of the premiums MBIA had agreed to cede to the reinsurers under the Repayment Contracts made significant loss not a reasonable possibility.

B. MBIA misstated its income in its 1998 financial statements

68. MBIA issued its 1998 financials in March of 1999. The financials fraudulently treated the $170 million in payments MBIA had received from the three reinsurers as reinsurance payments, and netted the payments against the $170 million in reserves that MBIA had booked as a result of the AHERF bankruptcy. (MBIA 16763). This enabled the Company to falsely report net income for the year of $433 million and earnings per share of $2.88. (MBIA March 8, 2005 press release).

69. The 1998 financials MBIA issued overstated net income and earnings per share by more than 25%. Had the financial statement properly treated the payments MBIA received from the three reinsurers as loan proceeds, net income would have been approximately $110 million less than the $433 million reported, and earnings per share would have been more than $.75 less than the $2.88 reported. (MBIA March 8, 2005 press release).

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70. MBIA’s 1998 annual report contained similar fraudulent statements. Utilizing the false numbers contained in the financials, the report falsely claimed that MBIA’s net income “increased 19%” over 1997. In fact, MBIA’s net income had decreased by more than 20%. The report further falsely stated that: “[c]ore earnings per share at $4.19 for 1998 grew by 14% over 1997 . . . continu[ing] our unbroken streak of double-digit increases since we became a public company in 1987” (MBIA 1998 Annual Report at 36), and boasted that: “with $170 million of reinsurance, our loss reserves, our earnings and our Triple-A ratings were unaffected.” (MBIA 1998 Annual Report at 5).

71. MBIA’s misleading 1998 financial results were republished in subsequent filings made in 1999, 2000, and 2001, and continued to create the false impression that the company had experienced an uninterrupted succession of profitable quarters.

C. MBIA’s executives benefitted from the scheme

72. The CEO and Chairman of MBIA at the time, David Elliott, personally benefitted from the AHERF scheme because he received a $750,000 bonus and more than $1,000,000 in stock, options, and other forms of compensation in 1998, increasing his total compensation 79% from the prior year. (1999 Proxy Statement at 8; MBIA 24265). This compensation was based in part on meeting performance goals that would not have been met without the AHERF scheme.

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73. The CFO at the time, Tehrani, also personally benefitted from the AHERF scheme. In an e-mail describing her 1998 accomplishments to David Elliott, she wrote: “My most important achievement for the year however, was the completion of the reinsurance program that allowed us to shelter the AHERF loss. I gain satisfaction from this task on several fronts - the significant financial benefit it provided MBIA, the opportunity it gave me to once again develop a creative accounting solution as I have done so many times in the past. . . .” (MBIA 24315). In his performance evaluation of Tehrani, Elliott wrote: “your biggest accomplishment was the pursuit, negotiation and effectuation of the special reinsurance program to cover AHERF and address our other needs. Your creativity, tenacity and refusal to give up saved the day for handling this loss and for securing the proper accounting treatment.” (MBIA 24314). Tehrani received a bonus of $275,000 and more than $500,000 in stock, options, and other forms of compensation in 1998, increasing her total compensation 16% from the prior year. (MBIA 24265).

D. MBIA’s 2003 statements

74. In September 2003, questions began to arise about the AHERF transaction as a result of publicity surrounding American International Group (“AIG”)’s transaction with Brightpoint, Inc. (“Brightpoint”).⁸ To distinguish the AHERF transaction from AIG/Brightpoint, MBIA claimed in public statements that it did not have any agreement to reimburse or compensate its reinsurers for the $170 million they paid.

⁸ On September 11, 2003, the Securities and Exchange Commission announced the settlement of enforcement actions against AIG and Brightpoint for AIG’s sale of a “non-traditional” insurance product to Brightpoint for the stated purpose of “income statement smoothing.”

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75. First, in the fall of 2003, MBIA posted on its website the following statement:

MBIA did not have any agreement to reimburse the reinsurers for the loss they paid. As part of this reinsurance arrangement, MBIA entered into quota share reinsurance agreements with the same reinsurers under which MBIA agreed to cede to them a specified amount of financial guarantee business over several years. Under these reinsurance agreements, the reinsurers agreed to assume both existing and future risk from MBIA and MBIA ceded the related reinsurance premiums. . . .

(MBIA 24520) (emphasis added).

76. Second, MBIA sent an October 10, 2003 e-mail in response to persistent questioning by a reporter concerning the AHERF transaction. The reporter asked whether “the reinsurers were compensated with future business” and whether this would “disqualify the transaction for reinsurance accounting purposes?” (MBIA 22778). MBIA’s e-mail to the reporter stated:

This premium [from the Repayment Contracts] was not compensation for the $170 million of stop loss coverage they provided to MBIA but rather they received a premium for the new risk they were assuming. (MBIA 22776).

77. In fact, the Repayment Contracts were compensation to the reinsurers for the Loss Contracts.

a. A 1998 internal presentation to the MBIA Risk Management Group on the AHERF transaction refers to the Repayment Contracts as “Repayment of Funds Sent by Reinsurers per [the Loss Contracts].” (MBIA 26663).

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b. All three reinsurers — Munich Re, Axa Re, and Zurich Re, made clear in their correspondence to MBIA that the Repayment Contracts compensated them for the payment they would have to make under the Loss Contracts. (MBIA 487, 5351; MBIA-IM 49; MR 8726).

c. PWC, MBIA’s auditor, stated in its analysis of the transaction that: “we know that the reinsurers would not have entered into the Excess contracts without the [Repayment] agreements.” (MBIA 3272).

d. An MBIA August 6, 1998 memo describing the Axa Re portion said that the “Cost” for the Loss Contract with Axa Re would include: “A promise to [pay] $97 million of adjusted gross premium of over 6 years. . . .” (MBIA 4679).

78. MBIA’s website posting and e-mail were also inaccurate as to the risk the reinsurers were assuming under the Repayment Contracts. The website posting stated without any qualification that the reinsurers agreed to assume “future risk from MBIA,” and the e-mail stated similarly that the premium MBIA was receiving was for “the new risk [the reinsurers] were assuming.” In fact, the Repayment Contracts ensured that the reinsurers would have no real risk of loss.

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79. MBIA’s 2003 statements did not put the AHERF issue to rest. On October 21, 2004, the reporter again asked whether there was a “transfer of risk” to the reinsurers. He asked whether the “guarantee of future business” was “a form of compensation.” He also asked: “Have any other comments changed since I wrote my original — or is there something you would like to add or clarify?” (MBIA 22717).

80. The Executive Chairman of MBIA, Jay Brown, gave his input concerning the reporter’s questions in an e-mail to MBIA executives, stating: “clearly the reinsurers entered the [Loss Contracts] because of the premium and the [Repayment Contracts]. To say anything different is inaccurate.” (MBIA 22716). The recipients of this e-mail then had a series of discussions about how to respond to the reporter.

81. MBIA’s written response to the reporter sent on November 1, 2004 did not correct its 2003 misstatements. (MBIA 22731).

82. On March 8, 2005, MBIA issued a press release that purported to correct its treatment of the AHERF loss. The press release stated that MBIA was restating its 1998 income and the income reported in subsequent years to “correct the accounting treatment” for the payment Zurich Re made to MBIA in 1998, and that “as a result of this restatement,” (a) MBIA’s financial result for 1998 would reflect a third quarter incurred loss of $70 million related to the AHERF bonds and its net income for 1998 would be reduced 11%; and (b) MBIA’s net income for the years 1999 through 2004 was inaccurate.

83. MBIA’s March 2005 press release corrected only the portion of MBIA’s 1998 overstatement of income that was due to MBIA’s mischaracterization of

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Zurich Re’s $70 million payment; it left uncorrected the portion of MBIA’s overstatement of 1998 and subsequent year income due to its mischaracterization of the $100 million paid to MBIA in 1998 by Munich Re and Axa Re. MBIA continues (a) to improperly treat those payments as reinsurance payments, (b) to overstate its 1998 income by approximately 14%, and (c) to issue financial reports that misstate its 1998 income.

84. The release also continued to describe the Munich Re and Axa Re Repayment Contracts with those reinsurers as “separately entered into quota share reinsurance agreements” under which the reinsurers “assumed new risk on a pro rata basis in exchange for the [ ] premiums.” MBIA again failed to disclose that the contracts had been designed to ensure that the reinsurers would have no real risk of loss and were regarded by all parties as compensation for the payments the reinsurers made under the Loss Contracts.

85. MBIA has advised the Attorney General and the Superintendent of its desire and agreement to resolve all issues related to MBIA in the Attorney General’s Investigation.

86. MBIA has fully cooperated and continues to cooperate with the Attorney General’s Investigation and the Superintendent’s Examination.

87. The Attorney General finds the sanctions and agreements contained in this Assurance of Discontinuance (the “Assurance”) appropriate and in the public interest. The Attorney General is willing to accept this Assurance pursuant to Executive Law § 63(15), in lieu of commencing a statutory proceeding.

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88. The Superintendent and MBIA will simultaneously with the Assurance enter into a Stipulation and MBIA will accept the New York State Insurance Department’s (“Insurance Department”) Report on Examination.

89. The Superintendent finds the relief and agreements contained in this Assurance and the corresponding Stipulation appropriate and in the public interest.

90. This Assurance is solely for the purpose of resolving the Attorney General’s Investigation, and is not intended to be used for any other purpose.

NOW THEREFORE, MBIA, without admitting or denying the above allegations, and the Attorney General hereby enter into this Assurance, pursuant to Executive Law § 63(15), and agree as follows:

I. Affirmative Relief

A. Disgorgement and Civil Penalty

1. MBIA shall pay $10,000,000 in disgorgement and restitution plus a civil money penalty in the amount of $15,000,000 for a total payment to the State of New York of $25,000,000. The $10,000,000 disgorgement and restitution payment shall be remitted and administered, together with the $50,000,000 payment payable in accordance with the Consent to Final Judgment filed by MBIA in connection with the matter captioned United States Securities and Exchange Commission v. MBIA Inc. on or near the date hereof (“SEC Judgment”).

2. The provisions in the SEC Judgment relating to the payment, administration and distribution of the $60,000,000 referred to in this section are incorporated herein by reference, and such terms are agreed to as part of this Assurance

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by MBIA. The $15,000,000 amount ordered to be paid as civil money penalties pursuant to this Assurance shall be treated as penalties paid to the State of New York for all purposes, including tax purposes.

3. MBIA agrees that it shall not, collectively or individually, seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to, payment made pursuant to any insurance policy, with regard to any or all of the amounts payable pursuant to this Assurance.

B. Independent Consultant Review

1. In accordance with the procedure specified in Paragraph 2 below, MBIA shall retain, pay for, and enter into an agreement with an independent consultant, not unacceptable to the Attorney General’s Office or the Insurance Department (“Independent Consultant”), to conduct a comprehensive review of the areas specified in subparagraphs (a) and (b) below, and to make recommendations to MBIA’s Board of Directors, after consultation with the Attorney General’s Office and the Insurance Department, regarding best practices in these areas. The agreement with the Independent Consultant shall contain the following provisions:

(a) The Independent Consultant shall review:

(i) MBIA’s accounting for, and disclosures concerning, its investment in Capital Asset Holdings GP, Inc.;

(ii) MBIA’s accounting for, and disclosures concerning, its exposure on notes issued by the US Airways 1998-1 Repackaging Trust; and

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(iii) MBIA Inc.’s accounting for, and disclosures concerning, any remediation transactions, during the period January 1, 1998 to the present, in connection with which MBIA Inc. or any of its affiliates repaid or acquired all or substantially all of an issue of insured securities insured by MBIA Insurance Corp., whether under the rights in an insurance policy, tender, or other means, other than as a result of (i) a claim or payment under the related policy or (ii) the exercise of a right to repay or acquire the insured securities under the insurance policy, tender, or other means when the outstanding amount of the insured securities is 10% or less of the original insured amount outstanding.

(b) The Independent Consultant shall also review the design of the review conducted on behalf of the Audit Committee of MBIA’s Board of Directors by Promontory Financial Group LLC, of MBIA’s compliance organization and monitoring systems, internal audit functions, governance process and other controls, including risk management and records management policies and procedures (the “Audit Committee Review”), and the implementation of any recommendations (or the agreed-upon procedure for implementation) by Promontory.

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(c) The Independent Consultant shall issue a report to the Attorney General’s Office, the Insurance Department, and MBIA’s Board of Directors within six months of appointment, setting forth:

(i) with respect to the items identified at subparagraph 1(a) above, his or her findings on whether MBIA acted in a manner consistent with generally accepted accounting principles (“GAAP”), statutory accounting principles and the federal securities laws. With respect to any matter as to which he or she concludes that MBIA acted in a manner inconsistent with GAAP, statutory accounting principles or the federal securities laws, he or she shall propose a plan of review designed to evaluate similar transactions or occurrences, if any, and provide reasonable assurance that all similar conduct inconsistent with GAAP, statutory accounting principles or the federal securities laws has been identified; and

(ii) with respect to the matters identified at Paragraph 1(b) above, his or her findings concerning whether the Audit Committee’s Review was reasonably designed and implemented and, if not, any recommendations for further review to determine what policies and procedures should be implemented to achieve best practices.

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The Report shall also include a description of the review performed, the conclusions reached, the Independent Consultant’s recommendations for any changes in or improvements to MBIA’s policies and procedures necessary to conform to best practices and a procedure for implementing the recommended changes in or improvements to MBIA’s policies and procedures.

Terms of Independent Consultant’s Retention

(d) In addition to the report identified above, the Independent Consultant shall provide the Attorney General’s Office, the Insurance Department and the Board of Directors with such documents or other information concerning the areas identified in Paragraph 1(a), above, as any of them may request during the pendency or at the conclusion of the review.

(e) The Independent Consultant shall have reasonable access to all of MBIA’s books and records, and the ability to meet privately with MBIA personnel. MBIA may not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing the Independent Consultant with contemporaneous documents or other information related to the matters that are the subject of the review. MBIA shall cooperate with the Independent Consultant, by, among other things, making available to the Independent Consultant the results of the investigation of Capital Asset conducted in 1999 by outside counsel at the direction of the Audit Committee of MBIA’s Board of Directors. The Independent Consultant may consider and use the results of such prior investigation to the extent he or she deems appropriate in the course

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of conducting his or her own review. MBIA shall instruct and otherwise encourage its officers, directors, and employees to cooperate fully with the review conducted by the Independent Consultant, and inform its officers, directors, and employees that failure to cooperate with the review will be grounds for dismissal, other disciplinary actions, or other appropriate actions.

(f) The Independent Consultant shall have the right, as reasonable and necessary in his or her judgment, to retain, at MBIA’s expense, attorneys, accountants, and other persons or firms, other than officers, directors, or employees of MBIA, to assist in the discharge of his or her obligations under these Undertakings. MBIA shall pay all reasonable fees and expenses of any persons or firms retained by the Independent Consultant.

(g) The Independent Consultant shall make and keep notes of interviews conducted, and keep a copy of documents gathered, in connection with the performance of his or her responsibilities, and require all persons and firms retained to assist the Independent Consultant to do so as well.

(h) As to the Attorney General’s Office and the Insurance Department, the Independent Consultant’s relationship with MBIA shall not be treated as one between an attorney and client. The Independent Consultant will not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing any information obtained in the review sought by the Attorney General’s Office or the Insurance Department.

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(i) If the Independent Consultant determines that he or she has a conflict with respect to one or more of the areas described in Paragraph 1 or otherwise, the responsibilities with respect to that subject shall be delegated to a person selected pursuant to the procedures set forth in Paragraph 2 below.

(j) For the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with MBIA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such; and shall require that any firm with which the Independent Consultant is affiliated or of which the Independent Consultant is a member, and any person engaged to assist the Independent Consultant in performance of the Independent Consultant’s duties under this Assurance not, without prior written consent of the Attorney General’s Office and the Insurance Department, enter into any employment, consultant, attorney-client, auditing or other professional relationship with MBIA, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement. For the purposes of this section, representation of a person or firm insured by MBIA shall not be deemed a professional relationship with MBIA.

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MBIA Obligations Relating to the Independent Consultant

2. Within twenty days of the date of entry of this Assurance, MBIA will submit to the Attorney General’s Office and the Insurance Department a proposal setting forth the identity, qualifications, and proposed terms of retention of the Independent Consultant. The Independent Consultant’s compensation and expenses shall be borne exclusively by MBIA, and shall not be deducted from any amount due under the provisions of this Assurance. After consultation and in coordination with the U.S. Securities and Exchange Commission, the Attorney General’s Office and the Insurance Department, within thirty days of such notice, will either (a) approve MBIA’s choice of Independent Consultant and proposed terms of retention or (b) require MBIA to propose an alternative Independent Consultant and/or revised proposed terms of retention within fifteen days. This process will continue, as necessary, until MBIA has selected an Independent Consultant and retention terms that are not unacceptable to the Attorney General’s Office and the Insurance Department (and the U.S. Securities and Exchange Commission).

3. MBIA shall adopt all recommendations contained in the report of the Independent Consultant referred to in Paragraph 1(c), above; provided, however, that within fifteen days of receipt of the report, MBIA shall in writing advise the Independent Consultant and the Attorney General’s Office and the Insurance Department of any recommendations that it considers to be unnecessary or inappropriate. With respect to any recommendation that MBIA considers unnecessary or inappropriate, MBIA need not

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adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose.

4. As to any recommendation with which MBIA and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement within thirty days of the issuance of the Independent Consultant’s report referred to in Paragraph 1(c), above. In the event MBIA and the Independent Consultant are unable to agree on an alternative proposal, MBIA will abide by the determinations of the Independent Consultant.

5. MBIA, including the board of directors and committees of the board of directors of MBIA, shall not assert the attorney-client privilege, the protection of the work-product doctrine, or any privilege as a ground for not providing any documents, information, or testimony requested by the Attorney General’s Office and the Insurance Department related to the review conducted by the Independent Consultant.

6. MBIA shall retain the Independent Consultant for a period of nine months from the date of appointment. The Attorney General’s Office and the Insurance Department or MBIA may in either’s discretion extend the Independent Consultant’s term of appointment.

7. Within ninety days of the receipt of the report referred to in Paragraph 1(c), MBIA shall certify to the Attorney General’s Office and the Insurance Department that all procedures recommended in the Independent Consultant’s report referred to in Paragraph 1(c), and any additional or alternative procedures agreed upon as a result of the procedure set out in Paragraphs 3 and 4 have been implemented.

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Accountants’ Report

8. MBIA shall engage certified public accountants, which may be MBIA’s usual public accounting firm, to: (a) review whether MBIA acted in a manner consistent with GAAP, statutory accounting principles and the federal securities laws in its accounting, for, and disclosures concerning: (i) advisory fees, and (ii) the assets of Triple A One Funding, LLC, MBIA Global Funding, LLC, and Meridian Funding Company, LLC, included in the consolidated financial statements of MBIA; and (b) provide a written report of its review and conclusions to the Attorney General’s Office and the Insurance Department within thirty days of the entry of this Assurance (the “Accountants’ Report”).

Miscellaneous Provisions

9. After consultation and in coordination with the U.S. Securities and Exchange Commission, the Attorney General’s Office or the Insurance Department may, in its discretion, (a) require MBIA to expand the scope of the Independent Consultant’s engagement to include (i) the review of similar transactions or occurrences referred to at Paragraph l(c)(i) above, or (ii) following the Attorney General’s Office’s and the Insurance Department’s review of the Accountants’ Report, MBIA’s accounting for, and disclosures concerning: advisory fees, or the assets of Triple A One Funding, LLC, MBIA Global Funding, LLC, and Meridian Funding Company, LLC, included in the consolidated financial statements of MBIA; and (b) extend any of the deadlines set out in Paragraphs 1-8, above.

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C. Restatement of Earnings

1. MBIA shall restate its earnings on a GAAP basis for the years 1998 to 2004 in order to properly account for the AHERF transaction.

2. MBIA agrees to make the recommended changes to its statutory financial statements as reflected in the Insurance Department’s Report on Examination.

D. General Relief

1. MBIA admits the jurisdiction of the Attorney General. MBIA will cease and desist from engaging in any acts in violation of the Martin Act and Executive Law § 63(12) and will comply with the Martin Act and Executive Law § 63(12).

2. Evidence of a violation of this Assurance by MBIA shall constitute prima facie proof of violation of the Martin Act and Executive Law § 63(12) in any civil action or proceeding hereafter commenced by the Attorney General against MBIA relating to the matters herein.

II. Other Provisions

A. Scope Of This Assurance

1. Definition: “Attorney General’s Investigation” means the Attorney General of New York’s investigation of MBIA’s disclosures and accounting relating to AHERF.

2. This Assurance shall conclude the Attorney General’s Investigation and any other issues arising from or relating to the subject matter of the Attorney General’s Investigation; provided, however, that nothing contained in this Assurance shall be construed to cover any claims that may be brought by the Attorney General to enforce MBIA’s obligations, either joint or several, arising from or relating to the provisions contained in this Assurance.

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3. If MBIA does not make the payments as provided in section I.A. of this Assurance (i.e., pursuant to the SEC Judgment), or MBIA defaults on any obligation under this Assurance, the Attorney General may terminate this Assurance, at his sole discretion, upon 10 days written notice to MBIA and MBIA agrees that, in that event, any statute of limitations or other time related defenses applicable to the subject of the Attorney General’s Investigation and any claims arising from or relating thereto are tolled from the date of signing of this Assurance to the date of any such written notice. In the event of such termination, MBIA expressly agrees and acknowledges that this Assurance shall in no way bar or otherwise preclude the Attorney General from commencing, conducting or prosecuting any investigation, action or proceeding, however denominated, related to the Attorney General’s Investigation, against MBIA or from using in any way any statements, documents or other materials produced or provided by MBIA prior to or after the filing of this Assurance, including, without limitation, such statements, documents or other materials provided for purposes of settlement negotiations.

4. Nothing herein shall preclude New York State, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations, other than the New York State Attorney General and only to the extent set forth in Paragraph II.A.2 above (collectively, “State Entities”) and the officers, agents or employees of State Entities, from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil or criminal or injunctive relief against MBIA arising from or relating to the subject of the Attorney General’s Investigation.

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5. Except in an action by the Attorney General to enforce the obligations of MBIA in this Assurance, neither this Assurance nor any acts performed or documents executed in furtherance of this Assurance: (a) may be deemed or used as an admission of, or evidence of, the validity of any alleged wrongdoing, liability or lack of wrongdoing or liability; or (b) may be deemed or used as an admission of or evidence of any such alleged fault or omission of MBIA in any civil, criminal or administrative proceeding in any court, administrative agency or other tribunal. This Assurance shall not confer any rights upon persons or entities who are not a party to this Assurance. Nothing herein shall be construed to prohibit the use of any e-mails or other documents of MBIA or of others.

B. Cooperation

1. MBIA shall cooperate fully and promptly with the Attorney General and shall use its best efforts to ensure that all the current and former officers, directors, trustees, agents and employees of MBIA cooperate fully and promptly with the Attorney General in all respects and such cooperation shall include, without limitation:

(a) production, voluntarily and without service of subpoena, upon the request of the Attorney General, of all documents or other tangible evidence requested by the Attorney General and any compilations or summaries of information or data that the Attorney General requests that MBIA prepare;

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(b) without the necessity of a subpoena, having the current and former officers, directors, trustees, agents and employees of MBIA attend any Proceedings (as hereinafter defined) in New York State or elsewhere at which the presence of any such persons is requested by the Attorney General and having such current and former officers, directors, trustees, agents and employees answer any and all inquiries that may be put by the Attorney General to any of them at any proceedings or otherwise;

(c) fully, fairly and truthfully disclosing all information and producing all records and other evidence in MBIA’s possession, custody or control relevant to all inquiries made by the Attorney General;

(d) waiving, upon request by the Attorney General, all privileges including, without limitation, attorney-client and attorney work product privileges, with respect to all matters relating to the Attorney General’s Investigation;

(e) waiving, upon request by the Attorney General, all privileges relating to any internal investigations concerning matters involved in the Attorney General’s Investigation (whether conducted before or after the signing of this Assurance), including, without limitation, production of all interview notes taken in connection with any internal investigations; and

(f) making outside counsel reasonably available to provide comprehensive presentations concerning any internal investigation relating to all matters concerning the Attorney General’s Investigation and to answer questions.

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2. All communications relating to cooperation pursuant to this Assurance may be made to MBIA’s attorneys as follows: John H. Hall, Esq., Debevoise & Plimpton, LLP, 919 Third Avenue, New York, New York 10022.

3. In the event MBIA fails to comply with this section of the Assurance, the Attorney General shall be entitled to specific performance in addition to any other remedies in the Assurance or otherwise.

C. Miscellaneous Provisions

1. This Assurance and any dispute related thereto shall be governed by the laws of the State of New York without regard to any conflicts of laws principles.

2. No failure or delay by the Attorney General in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided herein shall be cumulative.

3. MBIA consents to the jurisdiction of the Attorney General in any proceeding or action to enforce this Assurance.

4. MBIA enters into this Assurance voluntarily and represents that no threats, offers, promises, or inducements of any kind have been made by the Attorney General or any member, officer, employee, agent or representative of the Attorney General to induce MBIA and to enter into this Assurance.

5. MBIA agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in this Assurance

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or the Stipulation or creating the impression that this Assurance or the Stipulation is without factual basis. Nothing in this paragraph affects MBIA’s: (a) testimonial obligations; or (b) right to take legal or factual positions in defense of litigation or other legal proceedings to which the Attorney General is not a party.

6. This Assurance may be changed, amended or modified only by a writing signed by all parties hereto.

7. This Assurance constitutes the entire agreement between the Attorney General and MBIA and supersedes any prior communication, understanding or agreement, whether written or oral, concerning the subject matter of this Assurance.

8. If any provision of this Assurance is found to be unenforceable, such finding shall not effect the enforceability of the remaining provisions hereof.

9. This Assurance shall be binding upon MBIA and its successors and assigns.

10. This Assurance shall be effective and binding only when this Assurance is signed by all parties. This Assurance may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one instrument.

WHEREFORE, the following signatures are affixed hereto on the dates set forth below.

Dated: November 2, 2005

MBIA, Inc.

/s/ Gary Dunton

Name: Gary Dunton

Title: Chief Executive Officer and President, MBIA, Inc.

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ACKNOWLEDGMENT

STATE OF NEW YORK	)
	:ss.
COUNTY OF NEW YORK	)

On this 2^nd day of November, 2005, before me personally came Gary Dunton, known to me, who, being duly sworn by me, did depose and say that he is the Chief Executive Officer and President of MBIA, Inc., the entity described in the foregoing Assurance, is duly authorized by MBIA Inc., to execute the same, and that he signed his name in my presence by like authorization.

/s/ Barbara B. Edelmann

Notary Public

My commission expires:

BARBARA B. EDELMANN

Notary Public, State of New York

No. 4858965

Qualified in Westchester County

Commission Expires May 19, 2006

/s/ John H. Hall, Esq.

John H. Hall, Esq.

Debevoise & Plimpton, LLP

Attorneys for MBIA

919 Third Avenue

New York, New York 10022

Dated: Jan. 24, 2007

ANDREW M. CUOMO

Attorney General of the State of New York

/s/ Gary R. Connor

Gary R. Connor

Deputy Bureau Chief

Office of the New York State Attorney General

Investment Protection Bureau

120 Broadway, 23^rd Floor

New York, New York 10271

Dated: Jan. 25, 2007

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EX-10.85

Exhibit 10.85

	[LOGO]
[	STATE OF NEW YORK INSURANCE DEPARTMENT 25 BEAVER STREET NEW YORK, NEW YORK 10004	]

	X
In the Matter of
MBIA INSURANCE CORPORATION,		STIPULATION No. 2005-0218-S
Respondent.
	X

WHEREAS, Respondent MBIA Insurance Corporation (“Respondent”) is a domestic property/casualty insurance company authorized to transact the kinds of insurance defined in subparagraphs 16, 17 and 25 of Section 1113(a) of the Insurance Law; and

WHEREAS, an examination of Respondent conducted by the New York State Insurance Department (“Department”) pursuant to Sections 309 and 310 of the Insurance Law has revealed certain violations of the Insurance Law and/or Department Regulations; and

WHEREAS, Respondent has been advised and is aware of its statutory right to notice and a hearing on any such violations; and

WHEREAS, pursuant to the provisions of Executive Law § 63 (12) and Article 23-A of the General Business Law (the “Martin Act”), Eliot Spitzer, Attorney General of the State of New York (the “Attorney General”), caused an investigation to be made of Respondent and its parent corporation, MBIA, Inc. (collectively “MBIA”), related to, among other issues, the manner in which Respondent accounted for certain losses it incurred in connection with the default of Allegheny Health, Education and Research Foundation (“AHERF”) on approximately $256 million of bonds insured by Respondent; and

WHEREAS, the Department’s examination has resulted in certain findings of fact and recommendations contained in the Report on Examination of the MBIA Insurance Company as of December 31, 2003, dated September 21, 2005 (the “Report”), a copy of which is annexed hereto and incorporated herein; and

WHEREAS, Respondent acknowledges the acceptance, adoption and public filing of the Report by the Superintendent in accordance with Section 311 of the Insurance Law and hereby waives any hearing under Section 311 (b)(1) in connection therewith, and agrees to fully comply with the recommendations contained therein; and

In the Matter MBIA Insurance Corporation Page 2

WHEREAS, the Attorney General’s Investigation has been resolved pursuant to an Assurance of Discontinuance Pursuant to Executive Law § 63(15), dated November 2, 2005 (the “Assurance”), a copy of which is annexed hereto and incorporated herein; and

WHEREAS, pursuant to the Assurance and as set forth therein, MBIA has agreed to certain affirmative relief, including payment to the State of New York of $25,000,000 consisting of $10,000,000 in disgorgement and restitution plus a civil penalty in the amount of $15,000,000, payment of the additional sum of $50,000,000 pursuant to the Consent to Final Judgment in the matter captioned United States Securities and Exchange Commission v. MBIA Inc., and the engagement of an independent consultant to review certain areas of MBIA specified in the Assurance and issue a report thereon to the Attorney General and the Department; and

WHEREAS, Respondent is cooperating fully and will continue to cooperate fully with the Attorney General and the Department; and

WHEREAS, the Superintendent of Insurance finds the relief and agreements contained in the Assurance and this Stipulation appropriate and in the public interest; and

WHEREAS, Respondent desires to resolve this matter by entering into a Stipulation on the terms and conditions hereinafter set forth in lieu of proceeding with a hearing in this matter; NOW THEREFORE,

IT IS HEREBY STIPULATED AND AGREED by and between the Respondent and the Department, subject to the approval of the Superintendent of Insurance, as follows:

1. Respondent waives its right to further notice and hearing in this matter, and agrees to the acceptance, adoption and public filing of the Report by the Superintendent in accordance with Section 311 of the Insurance Law, and agrees to fully comply with all of the recommendations contained therein.

2. Respondent agrees to fully comply with all of the terms and conditions of the Assurance.

3. Respondent agrees to cooperate fully in all Department examinations and investigations.

4. Respondent acknowledges that this Stipulation may be used against it in any future Department proceeding if there is reason to believe the terms of the Assurance or this Stipulation have been violated by Respondent, or if the Department institutes disciplinary action against Respondent for any reason other than the acts considered herein.

Dated:	New York, NY
	November 2, 2005

In the Matter MBIA Insurance Corporation Page 3

NEW YORK STATE INSURANCE DEPARTMENT
By:	/s/ Jon G. Rothblatt
	Jon G. Rothblatt
	Principal Attorney
MBIA INSURANCE CORPORATION
By:	/s/ Ram David Wertheim
Name:	Ram David Wertheim
Title:	General Counsel and Secretary

STATE OF New York	)
	)	ss.:
COUNTY OF Westchester	)

On this 2^nd day of November, 2005, before me personally came Ram David Wertheim, to me known, who, being by me duly sworn, did depose and say that he/she resides at Two Catamount Road, Westport Connecticut; that he/she is the General Counsel and Secretary of MBIA Insurance Corporation, the corporation described in and which executed the above instrument; and that he/she signed his/her name thereto by order of the board of directors of said corporation.

/s/ Shella M. Lieberman

Notary Public

Shella M. Lieberman

Notary Public State of New York

No. 4998416

Qualified in Westchester County

Commission Expires June 29, 2006

EX-99.1

Exhibit 99.1

MBIA Inc.

113 King Street,

Armonk, NY 10504

Tel 914-273-4545

[GRAPHIC APPEARS HERE]		NEWS RELEASE
Contact:	Michael C. Ballinger	FOR IMMEDIATE RELEASE
	(914) 765-3893

MBIA ANNOUNCES SETTLEMENTS WITH THE SEC, THE NEW YORK ATTORNEY GENERAL AND THE NEW YORK STATE INSURANCE DEPARTMENT

ARMONK, New York – January 29, 2007 — MBIA Inc. (NYSE: MBI) and MBIA Insurance Corporation announced today that they have concluded civil settlements with the Securities and Exchange Commission (SEC), the New York State Attorney General’s Office (NYAG), and the New York State Insurance Department (NYSID) with respect to transactions entered into by MBIA in 1998 following defaults on insured bonds issued by the Allegheny Health, Education and Research Foundation (AHERF).

Gary C. Dunton, MBIA chief executive officer, said, “We are pleased that the AHERF-related investigations are finally behind us. MBIA cooperated fully with the regulators to resolve these matters, and we are grateful for the strong support of our employees, clients, shareholders and investors in MBIA-insured bonds during the long period while the investigations were being resolved. We are committed to earning their loyalty every day through our tradition of high integrity and excellent customer service as befits an industry leader.”

The terms of the settlements, under which MBIA neither admits nor denies wrongdoing, include:

• A restatement, which was completed and reported in MBIA’s third quarter 2005 earnings release, of MBIA’s GAAP and statutory financial results for 1998 and subsequent years related to the agreements with AXA Re Finance S.A. (AXA Re) and Muenchener Rueckversicherungs-Gesellshaft (Munich Re);

• Payment of penalties and disgorgement totaling $75 million, of which $60 million will be distributed to MBIA shareholders pursuant to the Fair Fund provisions of the Sarbanes-Oxley Act of 2002 and $15 million will be paid to the State of New York.

The Company accounted for the $75 million in penalties and disgorgement as a charge in the third quarter of 2005;

• MBIA’s consent to a cease and desist order with respect to future violations of securities laws;

• A report by MBIA’s independent auditors, PricewaterhouseCoopers (PwC), to MBIA’s board of directors, the SEC staff, the NYAG and the NYSID concerning MBIA’s accounting for and disclosure of advisory fees and the assets of certain conduits; and

• Retention of an Independent Consultant (IC) to review and report to the SEC, the NYAG and the NYSID on the evaluation previously undertaken at the direction of the Audit Committee of MBIA’s board of directors by Promontory Financial Group LLC of MBIA’s controls, policies and procedures with respect to compliance, internal audit, governance, risk management and records management, the Company’s implementation of Promontory’s recommendations; MBIA’s accounting for and disclosure of its investment in Capital Asset Holdings GP, Inc. (Capital Asset); and MBIA’s accounting for and disclosure of its exposure to the US Airways 1998-1 Repackaging Trust and any other transaction in which MBIA paid or acquired all or substantially all of an issue of insured securities other than as a result of claim under the related policy.

The settlements have brought the AHERF-related investigations against the Company to a close.

PwC completed and submitted to the SEC, the NYAG and the NYSID its report with respect to advisory fees and conduits. The report was reviewed by the regulatory agencies and has now been submitted in its final form. The Company does not anticipate further regulatory action with respect to the matters covered by the report.

The Independent Consultant began work in the summer of 2006 and is currently reviewing the matters described above. MBIA does not anticipate any further enforcement action against the Company with respect to any of the matters being reviewed by the Independent Consultant or with respect to any of the other matters that were under investigation. The Independent Consultant’s work is ongoing, however, and the outcome and completion of the IC’s work cannot be predicted. The Company is committed to a process for the review and implementation of the Independent Consultant’s conclusions and recommendations.

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MBIA made its original investment in Capital Asset in 1996 and increased that investment in December 1998, when it acquired the founder’s interest in Capital Asset and became majority owner. It issued financial guarantee policies on three securitizations of Capital Asset tax liens in 1997, 1998 and 1999. All of the financial guarantee policies have been extinguished.

In 1998, MBIA insured Series A Notes issued by the US Airways 1998-1 Repackaging Trust, which held equipment trust certificates for 21 aircraft leased by US Airways (ETCs). In 2002, following the filing for bankruptcy protection by US Airways, MBIA voluntarily paid the Series A Notes before a claim was made under its insurance policy, and foreclosed on and purchased the ETCs in the Repackaging Trust. Because there had been no claim under its policy and the payment of the Series A Notes was voluntary, MBIA accounted for the cost of foreclosing on and purchasing the ETCs as an investment rather than as a paid loss for both statutory and GAAP purposes. In 2005, in response to the findings of the NYSID in the quadrennial examination for the period ended December 31, 2003, MBIA changed its statutory accounts to classify the cost of foreclosing on and purchasing the ETCs as a paid loss; this change in classification had no impact on its financial results for any period.

MBIA Inc., through its subsidiaries, is a leading financial guarantor and provider of specialized financial services. MBIA’s innovative and cost-effective products and services meet the credit enhancement, financial and investment needs of its public and private sector clients, domestically and internationally. MBIA Inc.’s principal operating subsidiary, MBIA Insurance Corporation, has a financial strength rating of Triple-A from Moody’s Investors Service, Standard & Poor’s Ratings Services, Fitch Ratings, and Rating and Investment Information, Inc. MBIA has offices in London, Madrid, Milan, New York, Paris, San Francisco, Sydney and Tokyo. Please visit MBIA’s Web site at http://www.mbia.com.

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