MBIA Insurance — of parent holding company MBIA (MBI) — is suing Merrill Lynch over certain “misrepresented” credit default swap (CDS) contracts and related insurance policies. MBIA asks the New York Supreme Court to rescind — or unmake — the contracts and damages resulting from Merrill’s “misrepresentations” and contract breaches. According to the suit, Merrill marketed the CDS contracts to MBIA as part of a strategy to offload billions of dollars in deteriorating subprime residential mortgages. MBIA alleges that Merrill either packaged these bad mortgages into collateralized debt obligations or hedged their own exposure to them through insurer-guaranteed swaps. MBIA said it insured more than $5.7bn of credit default protection on “super-senior” and “senior” CDO tranches, the credit quality of which the company claims Merrill misrepresented. MBIA said it faces losses on the CDOs to the tune of “several hundred million dollars,” although no exact figure was given. “Although we will honor all legitimate claims by third-party policyholders, in this case Merrill Lynch is both the beneficiary of some of our policies and the party who improperly induced MBIA to issue these policies,” CEO Jay Brown said in a media statement. “Consequently, we are asking the court to rescind the contracts with Merrill Lynch and require them to compensate us for our payments to other counterparties.” Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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