[ by Melanie Gretchen and Howard Haykin ]

MBIA, the Armonk, NY-based bond insurer, is working with Weill Gotshal & Manges as it faces the risk of being taken over by the New York State Department of Financial Services.  The state agency, which regulatres New York insurers, has the power to put MBIA into a process known as "rehabilitation" - by which it can take control of a regulated insurer that does not have sufficient cash. 

MBIA recognizes the possibility, and disclosed that fact in its annual report in February.  The company had been the largest bond insurer in the United States before the financial crisis.  But following its 2009 restructuring, which split the company into a municipal guarantee business and a structured finance unit that had suffered heavy losses from mortgages, the insurer has faced heavy litigation. 

Bank of America and other lenders have attempted to have that restructuring annulled and sued the company, alleging that the reorganization was intended to defraud policy holders.  A New York state judge upheld the restructuring in early March - but that ruling is now being appealed.  As recently as February, MBIA said that its structured finance unit could be forced into liquidation or rehabilitation if litigation with Bank of America was not settled.

"Substantial doubt exists about MBIA Corp's ability to continue as a going concern." -- MBIA, in a statement at the time.

For further details, go to [Reuters, 4/29/13].