MANHATTAN (CN) – Financial Guaranty Insurance is trying to shirk more than $2 billion worth of liabilities it owes to Société Générale by terminating 22 derivative contracts for which the French bank is the beneficiary, the bank claims in Federal Court. France’s second-largest bank says it is part of a group in talks to restructure FGIC, which suffered “grave net losses” and may face liquidation.
In 2005 Société Générale entered into a master agreement for 22 credit derivative transactions, according to the complaint. In exchange for the protection afforded by the transactions, it agreed to make periodic fixed payments to FGIC Credit Products.
The Paris-based bank says that after missing two payments, for more than $100,000, it entered good-faith negotiations with FGIC to resolve a dispute over $1,200.
During those negotiations, Société Générale made five additional payments that the FGIC accepted, according to the complaint.
The bank says it announced within the three-day notice of cure period that it would pay the full amount that FGIC demanded, but FGIC rejected the payments and terminated all transactions under the master agreement, which “are backed by non-cancellable insurance policies.”
“FGIC’s efforts … were nothing more than attempt to take advantage of a good-faith disagreement over a minimal amount of money and use it to vastly improve FGIC’s distressed financial condition by injuring SG,” according to the complaint.
The New York State Insurance Department allegedly instructed FGIC in November to stop paying all claims and to provide a surplus restoration plan to address its capital impairment, the complaint states.
Société Générale says FGIC has been in “dire financial straits” since 2005 and lost about $800 million in two quarters of 2009. By clearing more than $2 billion in liabilities from its balance sheet, FGIC hopes to “influence the ongoing negotiations over its restructuring” and “alter its rapidly deteriorating financial health,” the bank says.
Société Générale sued FGIC and FGIC Credit Products, alleging breach of contract, bad faith and tortious interference. It seeks a ruling that it is not in default and that FGIC’s termination declaration is invalid.
The bank is represented by Michael Luskin with Hughes Hubbard & Reed.