Lehman Bros. Int'l (Europe) (In Administration) v. AG Fin. Prods.

Full title: LEHMAN BROTHERS INTERNATIONAL (EUROPE) (IN ADMINISTRATION) Plaintiff, v…

Court: Supreme Court, New York County

Date published: Mar 8, 2023

2023 N.Y. Slip Op. 30692 (N.Y. Sup. Ct. 2023)

Opinion

Index No. 653284/2011

03-08-2023

LEHMAN BROTHERS INTERNATIONAL (EUROPE) (IN ADMINISTRATION) Plaintiff, v. AG FINANCIAL PRODUCTS, INC., Defendant.

MELISSA A. CRANE JUDGE.

Unpublished Opinion

PRESENT HON. MELISSA A. CRANE Justice.

DECISION AFTER TRIAL

MELISSA A. CRANE JUDGE.

The trial in this case tasked the court to determine which valuation (if either) in a series of terminated credit default swaps (CDS), involving 28 reference securities (the "Securities" or "Transactions") under an ISDA Master Agreement was correct. The summary judgment decision in this case, Lehman Bros. Intl. (Europe) v AG Fin. Products, Inc. (60 Misc.3d 1214(A) [Sup Ct, NY County 2018] [Friedman, J.] [S/J Decision], affd 168 A.D.3d 527 [1st Dept 2019]), held "a Non-Defaulting Party's Loss (however calculated) should generally be within the range of what the market would pay for a replacement transaction. If a Non-Defaulting Party's calculation of Loss is not within that range, a genuine question may be raised as to whether the Non-Defaulting Party's calculation of loss was reasonable" (S/J Decision at *14). Thus, because the non-defaulting party here, AG Financial Products, Inc. (Assured), did not use market prices in calculating its own loss, the S/J Decision found an issue for trial.

That issue is, as plaintiff Lehman Brothers International Europe (LBIE or plaintiff) succinctly describes:

"whether Defendant AG Financial Products, Inc's [] calculation of the 'Loss' on 28 Credit Default Swaps ('CDS') was objectively reasonable and made in good faith under the parties' ISDA Master Agreement as of the July 23, 2009 termination date"

(Plaintiff's Post Trial Opening Br. [EDOC 777] at 6]).

Whether a specific valuation methodology is commercially reasonable and correctly applied is a mixed question of fact and law (In re Am. Home Mtge. Holdings, Inc., 411 BR 181, 193 [Bankr D Del 2009], affd but criticized 637 F.3d 246 [3d Cir 2011]).

The contract between the parties derives from a template known as the 1992 version of the ISDA (International Swap Dealer's Association) Master Agreement. Under the ISDA Master Agreement, "Loss" includes the amount a party "reasonably determines in good faith to be its total losses and costs ... including any loss of bargain" (JX-1 at 15 [Definition of "Loss"]).

The parties have disagreed about how to calculate Assured's "Loss" to such an extent that LBIE claims it is owed $485 million dollars, whereas Assured claims it is owed over $20 million dollars. This is a discrepancy of over $500 million dollars. As the court stated in its decision on the burden of proof dated March 1, 2022 (EDOC 774), LBIE bears the burden of proof to establish that Assured's calculation was unreasonable, and also, for the purposes of damages, the reasonableness of its own calculation. Assured bears the burden of proof on its defenses and counterclaims.

The trial in this case took place over a 5-week period in November 2021. Post-trial briefing concluded during the summer of 2022. The parties stipulated that the court could conduct the trial virtually given the Covid-19 pandemic. The court applauds both teams of attorneys who did a fantastic job educating the court about this highly complex financial arrangement and valuation. When this trial first started, the court was skeptical about how, given such a large discrepancy, Assured's calculation could ever be reasonable. As the trial progressed, however, there was a growing realization that the marriage of catastrophic, historical financial circumstances with bespoke contractual terms, along with strong structural protections in the Securities, lent itself to the conclusion that at least LBIE's calculations were not reasonable.

Given this growing realization, because LBIE had the burden of proof to show its own damages calculation was reasonable and that Assured's calculations were not reasonable, the court allowed LBIE to present a rebuttal case. Now, even with the benefit of that rebuttal case, and extensive post trial briefing, the court's growing realization has crystallized to conclusion. LBIE's valuation, that relied entirely on market prices its experts constructed for this litigation, was insufficient to meet LBIE's burden to prove its own calculations were reasonable. Not only did LBIE fail to demonstrate the existence of a uniform market practice to calculate "Loss" based on market prices, but it did not even show that market prices were available around the time of the valuation date, July 23, 2009. At that point in time, the markets were so disrupted that accurate market prices were non-existent.

Not that market prices would be relevant anyway. Once the auction failed, the ISDA Master Agreement allowed Assured to value its Loss in any reasonable manner and specifically stated that Assured "need not" consider market prices in that calculation. Assured is a monoline insurer.¹ It did not trade in CDS the way an investment bank would. Assured made its money from the premiums it received for the protection it provided. Also, Assured did not insure the value of the Transactions. It insured their payment flow as payments became due. Therefore, market prices were not even relevant to determining Assured's "Loss" - the only "Loss" under consideration.

1 A monoline insurer provides "only financial guarantee insurance, and not property, casualty, life, health, or disability insurance" (Aurelius Capital Master, Inc. v MBIA Ins. Corp., 695 F.Supp.2d 68, 71 [SDNY 2010]; see also Pacific Life Ins. Co. v U.S. Bank Natl. Assoc., 2022 WL 11305628, *6 n 10 [SDNY Oct 19, 2022] ["Monoline insurance is a form of credit enhancement that involves purchasing insurance to cover losses from any defaults."] [citations omitted]).

What would have been important to projecting the payments Assured might have had to pay out was the default rate of the mortgages in the mortgage pools underlying the Transactions. To determine that default rate, Assured relied on data from Intex involving those very mortgages. Assured also took into consideration market conditions, such as seasoning and government programs. It took into consideration the significant structural protections inherent in the Transactions, both on the pool and individual loan level. Assured came up with a 28% default rate on the ABX trades and 0% default rate on the others.

Assured, as a monoline insurance company, was in the business of projecting risk. It used the same model that its surveillance and loss reserve groups used in the regular course of Assured's business to estimate the losses on the Transactions. Unlike the banks, who had an incentive to sell as many of these securities as possible for investment purposes, Assured was operating as an insurer for their payment flow. Thus, for Assured, accurate modeling was critical to enter into these CDS. Otherwise, Assured could be left holding the bag with catastrophic results.

In calculating the Loss here, Assured followed the ISDA Master Agreement's contractual terms and considered all relevant circumstances. Accordingly, Assured has carried its burden to demonstrate that its valuation was commercially reasonable and in good faith.

I. WITNESSES

This trial involved extensive expert testimony. LBIE's witnesses were primarily experts: (1) Graham Bruce, Chief Executive at Ainigma Group, who testified about the market practice for valuing derivatives; (2) Leslie Rahl, the Founder and Managing Partner of Capital Market Risk Advisors, who testified about whether Assured's application of the "Loss" provision in the 1992 ISDA Master Agreement in determining the "Settlement Amount" was commercially reasonable; (3) Evy Adamidou, a Consultant on risk management, regulatory compliance, portfolio evaluation and restructuring, and valuation, who testified about market practice in relation to the 1992 ISDA Agreement; and (4) Dr. Peter Niculescu, a Partner at Capital Market Risk Advisors, who was LBIE's valuation expert. In addition, Dr. Eduardo Viegas, a Director at PriceWaterhouseCoopers, appointed to act as a public fiduciary overseeing LBIE's administration, primarily testified about events related to LBIE's attempts at novation and receipt of indicative bids.

Assured's experts were: (1) Joshua Cohn, Managing Principal of JBHS LLC, who testified about the history of the relevant contractual provisions and market practice for Loss calculations; (2) Dr. Craig Pirrong, Professor of Finance at the University of Houston, who testified primarily about market conditions at the time of valuation, July 23, 2009, and provided rebuttal testimony criticizing Professor Niculescu's valuation; and (3) David Prager, Managing Director at Goldin Associates, LLC, who was Assured's valuation expert. In addition, Assured called Benjamin Rosenblum - Chief Actuary at Assured; Michael Schozer - Former President at Assured during the relevant time period; and Rob Bailenson - Chief Financial Officer at Assured.

II. FINDINGS OF FACT

Plaintiff LBIE, a broker-dealer, purchased credit protection from Assured, a monoline insurer, on the 28 reference Securities/Transactions mentioned earlier. The deal involved an arrangement whereby LBIE would make premium payments to Assured in return for Assured covering shortfalls of principal or interest as they became due on the Securities. This, in turn, depended on whether the obligors within the pools of mortgages underlying the Securities paid or not. It is critical that, for the most part, Assured guaranteed payments over the life of these Transactions (see LBIE Response Brief [EDOC 782] at 38 ["(Assured) is right that the trades at issue were pay-as-you-go trades"]; see also JX-67 [internal LBIE memorandum recognizing that "(Assured) does not have to pay for principal losses as they occur (i.e. when the losses in the portfolio exceed the available credit enhancement for the relevant reference obligation), but rather at the legal final maturity of the assets when such principal payments are legally due"]).

The Securities fall into three categories:

1) Two ABX trades. These were two series of RMBS² trades that U.S. subprime mortgage loans payments would fund. These particular RMBS trades were on the "ABX index." This index measures the overall value and performance of the subprime residential mortgage market. Market data vendor Markit Partners (Markit) created and maintained the ABX index. In general, the ABX series were subdivided into rated "tranches." Tranches with higher ratings had less of an investment return, but also less risk. LBIE bought protection for "last cash flow" AAA Tranches of the 06-2 and 07-1 series. The level of tranche at issue would not suffer losses until more junior tranches had been wiped out (Prager Tr. at 2998, Bruce Tr. at 820-821). Pools of U.S. subprime loans that had originated in 2006 backed these tranches (Bruce Tr. at 825-826). Markit published official prices for the ABX trades at the close of every trading day (LX114; LX 133; but see Prager Tr. 3028-3029 [explaining that Markit does not reflect actual market prices, but that it reflects "mid market quotes" or "an indicative number"]).

2) CDS on UK RMBS (UK RMBS) trades: These 14 trades reference nine securities backed by five pools of residential mortgages that originated in the United Kingdom. Markit also regularly published prices for the mortgage-backed securities underlying these trades throughout 2009. These funds were similar in risk level to the ABX trades mentioned above (Prager Tr. 2999), with the additional protection of a "master trust structure" ensuring new loans were coming in all the time (id.), as well as a reserve fund to cover losses (id. at 3000).

3) 11 CDS on CLO (CLO) trades: These trades reference "collateralized loan obligations" or CLOs. These are pools of high yield loans, such as business loans, to small- and mid-sized companies that use assets, such as equipment, as collateral. The tranches at issue on these trades were "super senior AAA," which again meant that the lower tranches would have to be wiped out before the "super senior" level suffered any loss (Prager Tr. 3001).

2 A residential mortgage backed security (RMBS) is, more or less, a bond that makes payments generated by a pool of residential mortgages. As borrowers make payments, they are distributed to investors according to the seniority of their investment.

As the S/J Decision described, three agreements governed the Transactions at issue: (1) the aforementioned ISDA Master Agreement (JX-1 [EDOC 182]), (2) a schedule to that Master Agreement (EDOC 183) and (3) a negotiated confirmation for each Transaction (see e.g. EDOCS 184-211). Unlike most other CDS transactions, the CDS here did not require the posting of collateral (see AX-90030 at 6 [ISDA Collateralization Practices Market Review 2010] [reporting that 97% of credit derivatives are collateralized]). The transactions also did not call for physical settlement upon termination whereby the protection seller pays the face value of the asset to the buyer and the buyer delivers the reference asset to the seller.

A. LBIE Defaults Leaving Assured with the Right to Terminate and Calculate the Termination Payment

Because LBIE entered into letters of Administration and then bankruptcy on September 15, 2008, Assured was entitled to declare an event of default under section 5[a][vii][6] of the ISDA Master Agreement (JX-1). Section 6(a) of the ISDA Master Agreement authorized Assured, as the non-defaulting party, to terminate the Transactions (id.). Assured did terminate, but not until July 23, 2009, ten months later. Also, as the non-defaulting party, Assured had the right to calculate the termination payment (id., § 6[e][i][3]). The parties had previously elected to use "Market Quotation and Second Method" to calculate that termination payment.

The Market Quotation method required Assured to seek quotations from leading dealers in the relevant market, known as "Reference Market-makers." These quotations were to represent:

"an amount, if any, that would be paid to [Assured] (expressed as a negative number) or by [Assured] (expressed as a positive number) in consideration of an agreement between such party ...and the quoting Reference Market-maker to enter into a transaction (the 'Replacement Transaction') that would have the effect of preserving for [Assured] the economic equivalent of any payment or delivery ... by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions [i.e., under the applicable Confirmation(s)] that

would, but for the occurrence of the relevant Early Termination Date, have been required after that date . . ."

(id., § 14 ["Market Quotation" Definition]). The ISDA Master Agreement states that, "[i]f fewer than three quotations are provided, it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined" (id.).

B. Assured Conducts the Auction Properly

In accordance with its responsibilities under the ISDA Master Agreement, following its declaration of an event of default, Assured engaged the assistance of Henderson Global Investors, Ltd. (Henderson), to conduct an auction so that it could satisfy the ISDA Market Quotation process. Henderson contacted 11 potential bidders in advance of the auction that took place on September 16, 2009. Not one bid was received. The S/J Decision found the auction had been conducted properly (60 Misc.3d 1214(A) at *7 [Sup Ct, NY County 2019] ["Henderson was a qualified advisor and . . . the auction was designed to satisfy the Market Quotation requirement."]). The Appellate Division, First Department affirmed this holding (see Lehman Bros. Intl. v AG Fin. Prod., Inc., 168 A.D.3d 527, 528 [1st Dept 2019]).

C. Even Before the Auction, Perhaps Anticipating a Lack of Bids, LBIE Tried to Obtain Some Semblance of a Market Price.

1. Novation

It is undisputed that, even before the failed auction, LBIE tried for months to novate the transactions (i.e., find someone willing to step into LBIE's shoes). There were no takers. LBIE contends that the failure to novate was Assured's fault. What unknown amount a third party may or may not have paid to step into LBIE's shoes is too speculative to consider. Regardless, novation is not really relevant, and is not a factor in this decision, because the contract between the parties only called for the auction as a valuation exercise. Assured was under no obligation to value via a novation once that auction failed.

2. Indicative Bids

LBIE also points to three "indicative" (i.e., nonbinding) bids that their witness, Dr. Viegas, called "market color" and "indicative market data of where these transactions, these underlyings would be trading at that stage on termination date" (Viegas Tr. at 562-563). However, not one company was actually willing to make a binding offer (see e.g. LX 74, LX 74A). For example, LX 74A describes hesitation on the part of Citibank and JP Morgan, because LBIE did not reveal the counterparty (Assured). Even Nomura, the only entity to provide a true indicative bid, who must have known Assured was the counterparty,³ was unwilling to make a firm offer.

3 The same person who put together Nomura's bid, Juan Quintas, used to work with Viegas at LBIE.

Moreover, Nomura's indicative bid is full of disclaimers: "This is not investment advice of any kind and we do not purport any degree of accuracy in these levels." Mr. Quintas qualifies the indicative bid for Nomura even further: "please bear in mind that these are not firm protection bids from Nomura, and that none of these prices are actionable. This is not an offer or an invitation to trade" (LX 74).

More troubling statements appear in LX 74, the first page of which is an internal LBIE email from Andrew Porter to Viegas, dated July 30, 2009. LX 74 contains language reflecting that the solicitation of indicative bids may have been some attempt by LBIE to influence other banks (many of whom may have been in the same perilous boat as LBIE), to make any bid, so that LBIE could then argue for a market price valuation: "any color is good color to us and [Pearce at JP Morgan] is lobbying for them [his U.S. trading team] to at least put a number on it even if it is zero" (id.). Apparently, the "US Trading Team" at JP Morgan was hesitant to make an indicative bid, because that bid would be "completely inaccurate without knowing who they face" (id.). Whether the conversation Porter relates actually took place as described is somewhat irrelevant. What does concern the court is the import by a LBIE employee [Andrew Porter] that "any color is good color . . . even if it is zero." Why would LBIE not care if the bid was literally "zero"? This raises the concern that LBIE's goal, with respect to the indicative bids, was to make these trades seem as worthless as possible to then be able to collect the most from Assured in a lawsuit.

Additional evidence in the record supports that LBIE only sought the indicative bids to bolster its litigation position against Assured. AX 30013 is a June 2009 internal LBIE email from Paul Copley, who led the LBIE team involved with valuing the transactions with Assured. Copley wrote that "MTM [mark to market]⁴ is theoretically c$1bn," but that because "AGR [Assured] is a monoline insurer which is nearly bust and is restructuring to survive," even if LBIE could novate the transactions, they would only be worth "c$10-15m," and that because they could not get anyone to "bite" on the idea of sharing the credit charge, they were considering Assured as a "litigation candidate" (AX 30013 at 1). It was shortly after calling Assured a "litigation candidate" that LBIE solicited bids.

4 "Mark-to-market" is an accounting method by which the holder of an asset "adjusts the value of that asset on its balance sheet each period to reflect its fair market value . . . Mark-to-market accounting better represents the current market value of the asset[] on a company's balance sheet than does [its] historical date-of-purchase cost" (Ironworkers Local 580--Joint Funds v Linn Energy, LLC, 29 F.Supp.3d 400, 409 [SDNY 2014]).

Clearly, LBIE wanted those bids for litigation purposes. On July 22, 2009, the day before Assured terminated the transactions, David Swanson, another internal LBIE employee, who was expecting Assured "to terminate today," writes that "[f]or purposes of challenging their [Assured's] valuation, even indications should help, and this is what we have to rely on in other circumstances where we are reconstructing the market prices after the event" (see AX 30030). Finally, it stands to reason that, if one of these banks really wanted these Transactions, it would have bid at the auction.

Therefore, these "indicative" bids do not reflect anything more than LBIE's attempt at bolstering its litigation position. For this reason, and because they are literally nonbinding, indicative bids are of limited utility to try to place a market price on the transactions at issue in this case. They are also irrelevant. As discussed infra, this is because, once the auction failed, Assured (1) could value in any reasonable manner, (2) the ISDA Master Agreement specifically states that Assured "need not" consider market prices, and (3) market prices were not relevant to determining Assured's "Loss," which is the only "Loss" to consider. Therefore, relying on non-binding bids does not seem reasonable or relevant.

D. The Evidence at Trial Demonstrated Extreme Market Dislocation in General and for the Specific Financial Instruments in this Case

As LBIE's experts have acknowledged, the financial crisis that led to the demise of plaintiff, as well as others, was a meltdown of a magnitude not seen since the Great Depression (see e.g. Bruce Tr. at 863). There was substantial evidence at trial that the markets were dislocated, with trading values on these Securities substantially lower than their actual worth (Pirrong Tr. at 3487-3488, 3532; Niculescu Tr. at 1641 [agreeing that a decline in prices could be due to lack of liquidity]; see also AX 90199 [article by Assured's testifying expert, Josh Cohn, dated January 2009, entitled "Bruised, but Best in Show," describing the market at the time as "distorted" and "troubled"]). Cohn's article also notes the difficulty in determining the termination amount during periods of market disruption: "Certainly, in the troubled markets of late, many NDPs [non-defaulting parties] have found it difficult or impossible to get reliable quotes from dealers" and that "[i]n a distorted market, finding an accurate means of calculating damages may be difficult" (AX 90199; see also Firth, Derivatives Law and Practice [2021] [AX 90021] at 211⁵ ["Where there is no available market for a replacement transaction . . . it may not be possible to establish the Loss by reference to the market price."]; Anthracite Rated Invs. (Jersey) Ltd. v Lehman Bros. Finance S.A. [2011], EWHC 1822 (Ch) [Eng.] at ¶ 84 ["Anthracite"] [noting "the valuation and liquidity difficulties affecting hedge fund portfolios" in 2009]).

5 LBIE has objected to the use of the Firth treatise on hearsay grounds, but its own expert, Leslie Rahl, relied on it.

The trial evidence demonstrated that the 2008-2009 market was in free fall due to lack of liquidity, deleveraging and the exiting of traditional investors from the market (see e.g. AX 90196 [3/23/2009 report from the U.S. Department of Treasury describing the "[n]egative [e]conomic [c]ycle. . . where declining asset prices have triggered further deleveraging, which has in turn led to further price declines"]; see also Prager Tr. at 3025 [describing negative economic cycle]). Reflecting the roiling markets, Markit, upon which plaintiff so heavily relies, fell by a third during 2008-July 2009, because there were far fewer market participants (Prager Tr. at 3030-3031). That major market participants left the market, also compounded the lack of liquidity for these financial instruments (AX -90196; see also Prager Tr. at 3026, 3141-3151; Bruce Tr. at 854).

The Bank of England certainly believed at the time that illiquidity and uncertainty pervaded the market (AX -50072 at 13-15 [BOE October 2008 report]).⁶ That the U.S. Federal Reserve continued to extend its liquidity programs into the middle of 2009 is evidence that the markets remained illiquid into 2009 (see AX 90196 [US Dept. of Treasury Press release]).

6 LBIE complains that the BOE reports are hearsay but has staked its position on Markit, which is reflected in the BOE report. Nevertheless, the BOE report is admissible to show that the BOE thought markets were dislocated.

Remarkably, even LBIE's own expert, Leslie Rahl, in a strikingly similar case, Barclay's Bank PLC v Metcalf & Mansfield (2011 CarswellOnt 9183 [Can. Ont. Sup Ct]) ("Devonshire"), described market dislocation in early 2009 as "severe" and attributable to "extreme illiquidity, and risk premiums [that] were historically very high and much higher than the true credit losses that were reasonably predicted at the time" (AX 90027 at 18, 21 [Rahl Devonshire rebuttal]). Rahl also recognized that "[m]any market participants, accountants, the financial press, and even the U.S. Congress recognized the extraordinary divergence and questioned the appropriateness of mark-to-model during a crisis" (AX -90026 at 32 [Rahl's expert report in Devonshire]).

LBIE insists that the markets were not dislocated. However, this position flies in the face of the bulk of the evidence, reality, and its own expert's opinion in Devonshire.

Despite the grim market that existed for the Securities at the time, the evidence at trial also demonstrated a glimmer of hope. By June 2009, month-to-month housing prices rose for the first time in more than two years and delinquency rates began to drop (Prof. Niculescu Tr. at 1543-1544; Case Shiller U.S. National Home Price Index [AX-90198] [showing rising housing prices between May and June 2009]; Moody's August 2009 report at 1 [AX 50044] [stating "housing indicators are stabilizing"]). By July 2009, market observers, such as Standard & Poor's (S&P), projected that real estate prices would start to stabilize in the first half of 2010 (S&P July 2009 report at 6 [AX 50031]); see also Prager Tr. at 3013-3014 [noting that housing prices began to recover in June 2009]). Even Markit, upon which LBIE so heavily relies, reported that, as of July 23, 2009, conditions were improving (see LX-136 at 1 [Markit, The European ABS Market A Week in Review: 15-23 July 2009]). At trial, there was evidence to suggest that at least some of the recent recovery in housing prices was due to the advent of government programs earlier in the year to assist homeowners with loan modifications and refinancing, including HAMP and HARP (Prager Tr. at 3014).

Nevertheless, although real estate prices were starting to recover, the prices for the financial instruments based on this real estate remained dislocated (Prager Tr. at 3028 [noting that there was still concern about the economy and dislocation in the financial markets]; id. at 3145-3146 [noting that "current prices for ABX.HE indexes are inconsistent with any reasonable assumption for mortgage default rates"]; see also id. at 3150-3152; Pirrong Tr. at 3391 [noting that "the government still believed that there was dislocation in the trading markets through the middle of 2009"]).

LX 137, part of an ABX index, demonstrates dislocation for the very transactions at issue in this case. As Prof. Pirrong testified (Tr. at 3568), this document shows market dislocation because "rather curiously is that the higher quality . . . is giving you by far the most bearish indication of what is going to happen to housing prices" when housing prices were actually rising. In other words, the ABX Index is showing lower pricing on RMBS in the face of rising housing prices. There should NOT be an inverse correlation between the housing values and the value of the RMBS. One of the reasons, perhaps the main reason, RMBS prices remained dislocated is because of liquidity problems that "did not resolve quickly" and "extended into 2009" (Niculescu Tr. at 1641; see also AX 90196 [US Treasury Press Release describing continued negative economic cycle]). As Prof. Prager testified, because of this lack of liquidity, the U.S. Federal Reserve extended liquidity programs into the middle of 2009 (Prager Tr. at 3026, 3030, 3141-3151; see also AX 90196 [US Treasury Press Release]).

It was during this extreme dislocation, in September 2009, that the auction failed to produce a single bid. The failed auction is strong evidence that the market remained dislocated for the very financial instruments that are the subject of this case. Again, both this court and the Appellate Division, First Department have found, on summary judgment, nothing wrong with the way Assured and Henderson conducted that auction.

E. Loss Method

Because the auction had failed to produce any bid, much less the requisite three, the ISDA Master Agreement authorized Assured to use an alternative "Loss" method to calculate the termination payment. The Loss method comes into play when a Market Quotation "cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result" (ISDA Master Agreement ["Settlement Amount (b)" Definition])

The ISDA Master Agreement defines "Loss" in pertinent part, as:

"an amount [the Non-Defaulting Party] reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with ... [the] group of Terminated Transactions ..., including any

loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them)"

(id. ["Loss" Definition]).

The Loss method requires that a Non-Defaulting Party "determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable," and expressly states that "[a] party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets" (id. [emphasis added]).

This exception exists because market value is NOT necessarily loss of bargain for the non-defaulting party (see Anthracite, supra, ¶ 127 ["(I)t is by no means axiomatic that, in relation to derivatives, one party's loss approximates to the other party's gain."]). And this is particularly so, as the above discussion demonstrates, when markets are distorted, as they were here.

F. How Assured Calculated Its Own Loss

It is undisputed that Assured did not try to determine its Loss by reference to dealer quotations. Nor did it have to because the auction failed to produce a single bid. Rather, Assured netted the premium payments LBIE would have owed over the life of the transactions against the amounts Assured projected it would have had to pay to cover expected shortfalls in interest and principal (see JX-34 at Bates page AG 00074397). The premiums are a fixed amount so there is no real dispute as to that number. Where the parties' views diverge is with respect to the projected shortfalls on the underlying securities.

LBIE proclaims that no one knows how Assured calculated its loss, but this is not really correct. Assured's methodology is contained in JX-71, a presentation to Assured's Audit Committee, dated October 30, 2009, entitled "Third Quarter Loss Projections." Although this presentation involves all of Assured's CDS, this document reflects that Assured primarily used a projected default rate, and then calculated in a prepayment rate and loss severities to establish their overall projections. Assured ran four different scenarios (JX-71). As Ben Rosenblum, Assured's Chief Actuary testified, the most important factor out of them all was the default rate (Rosenblum Tr. at 1246, 1259, 1266-1269). With respect to the default rate, Assured projected that defaults would decline to levels consistent with historical norms by 2012 (id. at 1370).

For Assured, a monoline insurer in a highly regulated industry, accurate modelling was essential to its risk management.⁷ Accordingly, Assured used a similar methodology that it used in its underwriting process to project its losses here (see AX 20006 at 4 [Underwriting memo for ABX 2006-2]; JX-65 at 5 [Underwriting memo for ABX 2007-1]). This same methodology was also used to monitor the credit quality of the Transactions over time (see AX 70008 at 23-24 [Assured 2009 10-K]) and to determine regulatory reserves for the quarter ending September 30, 2009 by [Assured's] Credit Support Provider, Assured Guaranty Corp. (Prager Tr. at 3040; Rosenblum Tr. at 1126-1127; Schozer Tr. at 2213; AX 20005 at 2 [Frederico Report to Assured Board]). Mr. Schozer testified that there would be no other way of calculating loss that would have been consistent with Assured's business (Tr. at 2213-2217).

7 Assured, as a monoline insurer, was in the very business of assessing risk. Assured's September 2007 underwriting memo for these transactions, from before the financial crisis, noted that Assured was well protected with respect to these Securities (see e.g. AX 20004 at 19-20).

The regulatory reserve process that utilized the same methodology was: (1) independent and (2) subject to multiple layers of oversight. A Reserve Committee, comprised of senior executives of Assured, determined assumptions, loss scenarios and probability weights that it believed to be reasonable based on past assumptions and current market information (Rosenblum Tr. at 1237-1238). Then, an Audit Committee would review and approve what the Reserve Committee determined (Rosenblum Tr. 1238-1242). Assured's senior directors, its Chief Actuary, and its independent auditor, PriceWaterhouseCoopers (PwC), comprised the Audit Committee).

LBIE does not dispute that PwC audited the loss reserve assumptions and issued an opinion for Assured. The record does not appear to contain that opinion. However, testimony from Mr. Rob Bailenson, the CFO for Assured, implied that PwC approved Assured's methods. Mr. Bailenson testified that after an audit for year 2009, PwC "would agree with the assumptions and they issued an unqualified opinion for the company" (Bailenson Tr. at 2873). One would think that PwC would have raised a concern somewhere if they had found a problem with Assured's methodology (see Rosenblum Tr. at 1286 ["(A)s a practical matter given the challenges from (PwC) and our board, it would have been difficult to under report your expected losses."]).

1. ABX

On the two ABX trades, Assured determined that its payments to LBIE to cover shortfalls would have exceeded the amount of premium payments, and that it therefore would have owed LBIE approximately $27.5 million. In reaching this conclusion, Assured used actual performance data for the specific RMBS at issue from Intex, an industry standard platform. The data on Intex would have included such items as how many borrowers were delinquent, how many were in default, and the loss severities on the defaulted loans.⁸ LBIE does not challenge the reliability of Intex or its widespread use in the industry. Even one of LBIE's own exhibits, a Credit Suisse report, relied on Intex data (see LX 263 [Excel spreadsheet tab 2, "Intex Ticker"]). LBIE's experts also recognized the importance of Intex to the industry (see Adamidou Tr. at 1951 [recognizing that Intex was used in developing complicated models]; Niculescu Tr. at 1722-1725 [describing Intex as a "data library" used often for modelling]; Bruce Tr. at 937 [noting that Intex "was the market standard one from modeling CDOs with RMBS and other constituents"]).

8 Rosenblum (Tr. at 1213) describes Intex's data as coming from "trustee reports [that] have data about foreclosures. That information is then added . . . into Intex which is the standard industry modelling tool that most people use to model mortgage backed securities." Explaining how it worked, Rosenblum described "so, after data [is] uploaded into Intex, assumptions are layered on. So again, if we're talking about loss severity, you would put the loss severity curve into Intex. And then Intex is looking at . . . homes that default at each specific period of time . . . and it applies the loss severity at that point in time" (id.).

Armed with the Intex data, Assured then utilized models that its surveillance and loss reserve groups used to estimate expected losses for all of its transactions referencing similar securities (JX 34 at 5 [Assured's statement of calculations dated October 16, 2009]; Rosenblum Tr. at 1287-1288). Specifically, using the Intex data, Assured tried to determine: (1) how many borrowers in the relevant RMBS pools would default on their mortgages; (2) how many would prepay; and (3) loss severity⁹ (see Rosenblum Tr. at 1233-1234, 1246-1249). Assured came up with a default rate of 28% for ABX.

9 As the term implies, "loss severity" determines how severe the losses on the mortgages would be. In this context, the loss severity depends on how much the bank would recover once it sells the foreclosed upon property (see Prager Tr. at 3004 "severity is essentially the difference between a loan price and the sale price that's ultimately recovered").

Assured then took this rate and determined how defaults, prepayment and loss severity would evolve over time. In determining this evolution, Assured took into consideration market factors that: (1) the severity of the downturn in the housing market that had begun in 2007 was finally beginning to stabilize by July 2009; (2) government intervention to stabilize the housing market would be successful (Rosenblum Tr. at 1373-1374); and the recession was over, though the "bad period" would continue "up to 2012" (Prager Tr. at 3079).

2. Seasoning/Burnout

Continuing to evaluate utilizing actual performance data from Intex, Assured also took into consideration a circumstance common to large mortgage pools known as "burnout" or "seasoning" (see JX 71, at 0024-25 [Assured Guaranty Third Quarter 2009 Loss Projections discussing seasoning/burnout]). Burnout occurs because, within a pool of mortgages, those who are likely to default typically do so in the first few years of owning a home. By contrast, borrowers who are able to stay current on their mortgage payments for the first few years statistically have a lower likelihood of defaulting. As a result, the default rate in pools of mortgages decreases over time (Rosenblum Tr. at 1269-1270; Prager Tr. At 3066-3067). Then, Assured assumed that, because of the economic stresses that many borrowers faced during 2008, burnout would be even more pronounced and, accordingly, those borrowers who had managed to stay current on mortgages through 2012 were even less likely to default in later years (Prager Tr. at 3344-3345).¹⁰

10 Assured waited for ten months from LBIE's bankruptcy before terminating the Transactions. By doing so, Assured was able to wait out the market a bit until things were looking up. This waiting had the consequence of lowering its liability to LBIE, because its projections could then utilize the more positive data that developed. To the extent the claim was not already dismissed at the summary judgment stage, LBIE has not argued at trial that this waiting period was in bad faith, or the termination date should have been earlier. Rather, it is undisputed that the termination date is July 23, 2009.

LBIE, through Professor Niculescu, reasoned that when home values drop below that of the mortgage, homeowners walk away from their mortgage payments, and that therefore a drop in housing prices would lead to defaults. While walking away may make financial sense for a business loan, it does not for a home loan. This is because people need to live somewhere and likely would prefer making payments on an underwater house to homelessness or moving somewhere perhaps less desirable.

Thus, Assured continued to project historically high default rates in its model for a period of 24-27 months, while reasoning (as it turns out, correctly) that over time, the percentage of defaulting borrowers would eventually return to levels more consistent with historical norms (JX 71 at 23-25 [forecasting that "the CDR plateau would begin improving 24 months from now, which is after the currently delinquent loans" would have liquidated]; see also Rosenblum Tr. at 1169). To project over long periods of time was consistent with the contractual arrangement between the parties whereby Assured was only to cover as payments became due over the life of the Transactions. Assured settled on a default rate of 28%.

3. The Predictions from the Ratings Agencies Were Close to Assured's Predictions and more Credible than Predictions from the Banks

Assured was not alone in its assumptions. For example, the ratings agency, Moody's, made similar predictions based on the same factors, including that government bailout plans would engender loss mitigation (see AX50083 at 1, 7 [Moody's March 5, 2009 Report entitled "Subprime RMBS Loss Projection Update, March 2009"]). Like Assured, Moody's reduced its loss projections forecasts for vintage year 2006 to 30%, in large part due to "[p]otential government-sponsored modification programs" (id. at 7; see also id. at 8, 12). For certificates rated B2 or higher, like those at issue here which were AAA, Moody's predicted these were "likely to be paid off in full under expected conditions" (id. at 13).

Other ratings agencies made similar predictions. On July 6, 2009, Standard & Poor's, that had previously been more optimistic than Moody's, revised its default projections for subprime RMBS to 32% (see AX 50031 at 4), a number close to Moody's 30%. However, unlike Moody's, S&P did not appear to weigh the government bailout programs as a significant ameliorating factor. Fitch, another ratings agency, concluded a higher default rate of 39%, but did not disclose its methodology at all (see LX 367).

It is true that, as LBIE points out, Moody's subsequent August 13, 2009 report (AX 50044) discusses how the slow start of the Obama Administration's Home Affordable Modification Program (HAMP) plus the "large overhang of foreclosures" had the effect of delaying a rise in home prices (id. at 2). Moody's ultimately concluded that the process to limit foreclosures would "take longer than initially expected (id. at 3). Moody's also noted that "[c]urrent performance trends are tracking the projections we (previously) made for sub-prime, Alt-A and Option ARM pools" but that loss severity was coming in higher than it had previously projected (id. at 7). Nevertheless, more important, in this document, Moody's stated that housing prices were stabilizing and to expect the trough by mid-2010 (AX 50044 at 1). This is actually earlier than when Assured predicted the market would begin to recover. It is only LBIE's model that predicted housing prices would remain depressed, perhaps for decades (Prager Tr. at 3078 [describing Dr. Niculescu's model at 60% of his initial default rate all the way to 2020]).

LBIE's fallback position is that the earlier report (Moody's March 2009 report) used stale data. However, Standard & Poor's projections are nearly the same and their report is from July 6, 2009, extremely close in time to the July 23, 2009 valuation date Assured had to use. Moreover, Moody's did not change its loss estimates in its August 2009 report from its March 2009 report (AX 50044 at 9).

Because the ratings agencies had a much lower valuation than the one LBIE's experts contrived for this litigation, LBIE casts aspersions on the ratings agencies. According to LBIE, the ratings agencies had a notorious conflict of interest because they were in the business of selling ratings and too much pessimism would "drive issuers to take their business to a competitor agency willing to shade its projections" (Niculescu Tr. at 3841; see also id. at 3845-3846). LBIE, therefore, urges the court to consider projections from the banks, rather than from the ratings agencies.

But the estimates from the bank reports are suspect. The losses they project are hundreds of millions of dollars larger than those of the ratings agencies. LBIE encourages the court to use, in particular, the projected rate from Barclays' Bank. Barclays' projection was 67% (see LX 137 [ABX weekly recap from Barclay's Capital dated July 27, 2009]).

Barclays' projections are quite dubious. Not only is the loss percentage projection more than twice as high as the ratings agencies, but, as LX 137 discloses on page 5, "[o]n September 20, 2008, Barclays Capital Inc acquired Lehman Brothers' North American investment banking, capital markets and private investment management business." Therefore, by the time it issued this report on July 27, 2009, Barclay's could easily have known Lehman N.A.'s related entity, LBIE, was facing Assured on the Transactions. Barclay's, therefore, may have had an incentive to project huge losses so that LBIE could recover as much as possible from Assured, LBIE's monoline. Prof. Niculescu's projections, that rely so heavily on the default rate from a bank that had inherited Lehman North America, are suspect as well and seem designed simply to make LBIE's losses as high as possible without regard to a true projection. Compare Barclays' projections to those of Goldman Sachs, which had not purchased a part of Lehman. Goldman Sachs (AX 50084 at page 20) was forecasting losses on the 2006 vintage subprime collateral at between 18.2-27%. This is even lower than Assured's forecast.

There is also evidence that bank reports in general might not be objective (see e.g. LX 119 at 0013 [JP Morgan report dated July 9, 2009] ["Research strategists routinely consult with JP Morgan Trading desk personnel in formulating views, opinions and recommendations in preparing research . . . . Therefore, this research may not be independent from the proprietary interests of JP Morgan trading desks."]).

Thus, it stands to reason that, at that time of extreme market disruption, the banks had every incentive to make the outlook for the Transactions seem as dire as possible in order to set the stage to collect more from their monoline insurers. Meanwhile, the ratings agencies had come under extreme disapprobation for failing to predict the financial crisis (see LX 266 at 6-7 [Memorandum from J. Levinson of U.S. SEC, dated October 2, 2008, re: Meeting with representatives from Assured to discuss Release No 57907, and attached slides from Assured]; AX 50022 at 241 [Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011] [concluding that "the credit rating agencies abysmally failed"]; AX 50093 [Moody's CEO's Statement to the SEC, dated April 15, 2009]).¹¹

11 Prof. Pirrong testified that the ratings agencies took a lot of criticism at the time for using flawed models (Tr. 3495-3496).

The ratings agencies were aligned with neither the banks nor the monolines. They had nothing to gain from putting forth a biased viewpoint on the crisis involving RMBS. Instead, given prior mistakes and the "loss of confidence in the credit ratings industry" (AX 50093 at 1), it was terribly important for the prognostications of the ratings agencies to be correct. Perhaps this is why, unlike the banks, the ratings agencies, by and large, disclosed the methodology behind their projections (see also AX 50093 [April 2009 testimony of Moody's CEO to the SEC describing measures it had implemented to "enhance the quality, independence, and transparency of ratings," including "increasing the transparency of rating agencies' performance, methodologies and quantitative models" and "addressing conflicts of interest"]).

Accordingly, the court finds that information at the time, from ratings agencies like Moody's and Standard and Poor's, to be more reliable than prognostications from the investment banks that undoubtedly were already in litigation or were contemplating litigation against their monoline insurers. Assured's rate aligns with Moody's 30% rate and S&P's 32% rate (see Prager Tr. at 3095 ["I wouldn't expect them to be equal, but in terms of order of magnitude, it shows me that they are thinking about things in very similar ways."]).

4. Structural Protections

The Transactions for which Assured protected the cash flow had significant structural protections. For example, with respect to the ABX trades, LBIE bought protection for "last cash flow" AAA Tranches of the 06-2 and 07-1 series. As discussed previously, this high level of tranche would not suffer losses until more junior tranches had been wiped out. According to Dr. Prager, that is why Assured could project 28% lifetime collateral losses on the ABX. As Dr. Prager explained:

"The structural protections are working here. The structural protections are designed to create just this scenario. Where there are losses and the losses are incurred and suffered at other levels within the structure and before they get to the AAAs and if everything works according to plan, they never get to the AAAs"

(Prager Tr. at 3104).

With respect to the rest of the transactions, the UK RMBS and the CLO's, Dr. Prager explained the significance that these transactions held on to their AAA rating in 2009:

"even though some transactions had started to see deterioration and increased risks and these particular transactions were not seeing that increased risk and made it through the depths of the housing market and the depths of the recession and were moving towards the other side still maintaining that AAA rating"

(id. at 3107).

Again, the tranches at issue on these trades were "super senior AAA" which again meant that the lower tranches would have to be wiped out before the "super senior" level suffered any loss (id. at 3001).

There were additional protections on the individual mortgage level underlying the ABX trades. As Dr. Prager testified, "each of the mortgage loans here represent only about 80% of the value, the initial value of the home. So even if there were to be a default, before there is loss to that loan, the value that was realized from selling the home would have to be at least 20% where it was sold" (id. at 2996). There were also protections at the "pool level." Dr. Prager testified that there was an additional level of equity and over collateralization at the pool level from mixing mortgage notes, and that, on average, the FICO score was closer to 625 and could be considered "near prime," as opposed to "subprime" (id. at 2996). Also, there was protection because of "excess spread," where the funds take in more in interest (Prager gave the example of 5%) than they are paying out in interest (Prager used an example of 4%). This excess spread of 1% "provides additional support for the RMBS securities" (id. at 2998).

Dr. Prager described an even greater "equity cushion" for the UK RMBS (id. at 2999) and discussed additional protection from the UK RMBS' "master trust structure," whereby new loans and new collateral constantly enter the pool (id. at 2999-3000). Finally, Dr. Prager testified that there were even further protections for the UK RMBS at issue because "overcollateralization at the pool level was about ten percent and then there were also reserved funds that were set up at initiation where there was additional cash set aside in order to cover the loans" (id. at 3000). Dr. Prager testified that there were similar structural protections in the CLOs (id. at 3000-3001).

5. Assured's Result

Based on its modeling, and again, using Intex data for the very securities at issue, Assured calculated losses in favor of LBIE of $27,577,817.65. Subtracting this amount from the $48,241,117.85 in unpaid premiums that LBIE would have owed, the loss calculation was in Assured's favor at $20,663,300.20.

Using its discounted cash flow analysis and projections used across its business, Assured calculated that it would owe nothing on the UK RMBS, CLO, and CDO trades because there would ultimately be no losses (see JX 34 [Assured's statement of calculations dated October 16, 2009]). During the crisis, these transactions remained investment grade (Rosenblum Tr. at 1309-1310 ["We're so far removed from a loss emerging that it is very difficult to imagine a loss coming out and assigning a real probability that this would occur to Assured."]).

Mr. Rosenblum testified that the surveillance runs that he performed for these assets showed no losses (see id. at 1296-1299) because Assured assumed a conservative stress case of a 5.4% base loss rate (historically the losses were .1 percent or less) (see AX 20020, tab 4). This, according to Rosenblum, combined with the senior tranche status of the layer, for which Assured provided protection, meant no losses: "We have a base case loss of 5.4 percent, and our credit enhancement is 11.7 percent. So, in other words, losses would have to double to get to any-to- and then it still wouldn't attach to our layer" (id. at 1309).

Again, Assured ran its data through Intex, an industry standard platform for modelling cashflow models. And, again, like the ABX, the data was for the exact transactions at issue. Therefore, in calculating how these transactions were going to perform, Assured looked at actual performance data. As Mr. Rosenblum testified:

"for all our transactions that attracted loss reserves, particularly in the RMB-in the mortgage-backed securities space, the first place we looked at is the actual performance data of the transaction. That's really the most important piece is some ways is: How are the borrowers in the transaction performing? Are they going delinquent? Are they-are their homes being liquidated? If so, what loss severities? Do prepayments exist? And that is really the starting place for looking at it. And then, above that, we layered in out-anything else we could see in the market that we thought was useful"

(id. at 1213).

Thus, Assured utilized the same practices that it employed in its general course of business in determining how the Securities were likely to perform. In doing so, it took into account the relative strength of the underlying instruments, including their senior position in the pool, the improving market conditions, and significant structural protections. It also used data for the very securities at issue from Intex, a recognized industry platform. The default rate it came up with is close to the default rate from Moody's and S&P (see Prager Tr. 3344, testifying that Moody's and Assured's default rates were not materially different).

III. LEGAL FRAMEWORK

It bears repeating that, because the auction had failed, Assured was entitled to calculate utilizing the "Loss" method. Again, the definition for "Loss" under the contract between the parties is:

"an amount [the Non-Defaulting Party] reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with ... [the] group of Terminated Transactions ..., including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them)."

Again, under the ISDA Master agreement "A party may (but need not) determine its Loss by reference to quotations of the relevant rates or prices from one or more of the leading dealers in the relevant markets."

In general, "selecting Loss to calculate an Early Termination Payment affords the non-defaulting party discretion and flexibility in selecting the means for calculating its Loss, subject to such methodology being reasonable and in good faith" (In re Lehman Bros. Holdings Inc v Intel Corp., 2015 WL 7194609 at *12 [Bankr SDNY Sept. 16, 2015] [Intel]; see also Barclays Bank PLC v Devonshire Trust, [2013] OJ No 3691, ¶ 268 [Can Ont] [CA] [holding that "the ISDA Master Agreement requires a Non-Defaulting Party's calculation of Loss to be reasonable and made 'in good faith.' It must also produce a commercially reasonable result"]). The court in Intel has described loss method as "an express alternative to the rigid methodology and procedure of . . . Market Quotation" (Intel, supra at *11).

Certain cases have endorsed the concept that "Loss and Market Quotation are, although different formulae, aimed at achieving broadly the same result, so that outcomes derived from one may be usefully tested by way of cross-check reference to the other" (Anthracite Rated Invs. (Jersey) Ltd. v Lehman Bros. Finance, S.A., 2011 EWHC 1822 (Ch) [Eng.] at ¶ 116 [1-2]). Nevertheless, "there may be circumstances in which the Market Quotation measure would not operate satisfactorily" (Peregrine Fixed Income Ltd. v Robinson Dep't Store Public Co. Ltd., [2000] CLC 1, 328 [Eng.] ["Peregrine"]).

Commentary to the ISDA Master Agreement confirms that "Loss" is supposed to be flexible, involves more than what a Market Quotation exercise would take into consideration, but still may take into account market prices. The "User's Guide to the 1992 ISDA Master Agreements" states:

"Under the 1992 Agreements a payment on early termination can be viewed as consisting of the following three components: (i) payments for obligations which became payable or deliverable but which were not paid or delivered prior to the Early Termination Date, (ii) payments for obligations which would have been payable or deliverable prior to the Early Termination Date if all conditions to payment or delivery (such as the absence of any Event of Default) had been satisfied or if the Early Termination Date had not been designated and (iii) payments for the future value of the Terminated Transactions or the Agreement, as the case may be.... Amounts referred to in clause (iii) are included in the

definition of 'Market Quotation'. Amounts referred to in clauses (i) - (iii) are encompassed within the definition of 'Loss.'"

Thus, "Loss" is clearly broader than "Market Quotation" and, to some degree, payments for the future replacement value of the transactions may be included in the calculation of "Loss" (see Bank of New York Mellon Tr. Co., N.A. v Solstice ABS CBO II, Ltd., 2012 WL 13070212, at *7 [SDNY Mar. 28, 2012] ["The User's Guide thus confirms that both the definitions of "Market Quotation" and "Loss" include calculations of the future value of the Transaction"]). For instance, in CDO Plus Master Fund Ltd. v. Wachovia Bank, N.A. (2011 WL 4526132 [SDNY Sept. 29, 2011]), the court approved Wachovia's estimate because it was able to acquire a quotation and two indications from Reference Market-makers (id. at *2; see also Brittania Bulk PLC [in liquidation] v Pioneer Nav. Ltd. [2011] EWHC 692 (Comm) ["(I)t would be very odd if the two payment measures [i.e. loss and market quotation] were not intended to achieve broadly the same result."]).

Nevertheless, there are many times, especially during occasions of market disruption, when applying the two valuation measures causes extremely divergent results. (see e.g. Devonshire, Anthracite Rated Invs. (Jersey) Ltd. v Lehman Bros. Finance S.A. [2011] EWHC 1822 (Ch) [Eng.] at ¶¶ 16-17 [both these cases involved the same time period as that involved in this case]).

The ISDA Master Agreement anticipates times when a market quotation will diverge sharply from other valuation methods by stating that a non-defaulting party "may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets" (see also Lehman Bros. Holdings Inc. v. Intel Corp., 2015 WL 7194609, *11 (Bankr SDNY Sept. 16, 2015] [interpreting exact same loss provision and holding it is within a party's discretion not to use market quotations in determining Loss]). The ISDA Master Agreement also specifically states that, even if there were relevant market quotations, the non-defaulting party need not take them into consideration where to do so "would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result" (ISDA Master Agreement [JX 1 at 16] [Definition of "Settlement Amount" (b)]).

Thus, under the ISDA Master Agreement, the non-defaulting party "need not" consider market prices, especially where to do so would render the Termination amount "commercially unreasonable." By limiting the use of market prices, ISDA thereby contemplates a situation, like the one here, where market prices are completely divorced from value. In addition, ISDA's "Loss" provision is flexible enough to take into account all types of "loss of bargain," even Assured's, which had nothing to do with market prices.

Where reference to market prices does not always lead to a commercially reasonable result, courts favor a valuation that does not use market prices. "If a market price is unavailable or the market is disrupted or dysfunctional, one must use a different method [than market prices]" (In re Am. Home Mtge. Holdings Inc., 411 BR 181, 190-193 [Br Del 2009), affd 637 F.3d 246, 257 [3d Cir 2011] [finding that the "commercially reasonable determinant of value" for measuring damages was "discounted cash flow method" where there was no dispute that the "mortgage market was dysfunctional on the acceleration date"]).

Market prices leading to a commercially unreasonable valuation is especially likely during periods of severe market disruption where reliable market prices may not exist. Courts have therefore made distinctions between market prices and the value of an instrument during times of market disruption (see National Credit Union Admin. Bd. v UBS Sec., LLC, 2016 WL 7496106, at *5 [D. Kan. Dec. 30, 2016] ["The lack of a market does not necessarily mean, however, that the OTCs had no value to NCUA-Liq, and indeed, the possibility of future income suggests that the OTCs did have some value."]). The National Credit court also questioned why a discounted cash flow model would not be appropriate in times of illiquid markets (id.).

A valuation during the same time period of severe market disruption as that involved here is exactly what occurred in the closely analogous Canadian case of Barclays Bank, PLC v Devonshire Trust (2011 CarswellOnt 9183 [Ca. Ont. Sup. Ct J.] [Devonshire Trial Decision], affd in part, revd in part Barclays Bank PLC v Devonshire Trust, 2013 CarswellOnt. 11271 [Ca. Ont. CA] [2013] [Devonshire Appellate Decision]). Like here, the parties operated under the identical ISDA provisions regarding "Loss" and there was a huge discrepancy in valuations. Barclays claimed to have suffered a loss of $1.2 billion [2011 Devonshire Trial Decision at ¶ 5). Meanwhile, Devonshire claimed Barclays was entitled to, at most, $12,000 (id. at ¶ 143). Devonshire, like Assured here, "sold Barclays protection against the possibility of credit defaults" (id. at ¶ 115), while Barclays, like LBIE, paid Devonshire a monthly premium for this protection (id. at ¶ 15). Like the Transactions in this case, the assets in the portfolio in Devonshire were "super senior" (id. at ¶ 20), meaning the risk of loss was relatively low. Importantly, like here, Devonshire tried, but was unable to obtain, any quotation from any market participant (id. at ¶ 335).

The timing in Devonshire is critically similar to the timing here. The valuation date in Devonshire was January 13, 2009, while the valuation date here is July 23, 2009. In addition, both here and in Devonshire, the valuation date was removed from the actual date of default. In Devonshire, there was a 17-month standstill (id. at ¶ 369). Here, Assured terminated the Transactions 10 months after Lehman declared bankruptcy. Again, LBIE does not argue that this gap was improper.

The Devonshire trial judge rejected Barclays' $1.2B valuation. Noting the disruption in the market in 2009 due to extreme illiquidity, and the failure to obtain any market quotation from the auction, the court rejected Barclays' attempt to recreate market prices via their proprietary model:

"It makes little sense, in my view, for a party to say there is no identifiable market price, because no one will make a firm bid, i.e. there is no market for the swap, and so we will use some construct to come up with a price as if there were a market and call that construct the market value of our loss. That would be making an assumption that there was a functioning market, and if there is no functioning market, I see no basis to construct one. The definition of loss certainly does not indicate that in its language"

(id. at ¶ 403 [emphasis added]).

In reaching this conclusion, the court noted the extreme market disruption that existed in 2009:

"In this case, the ABCP market in January 2009 had been frozen and in turmoil for seventeen months and the collapse of Lehman Brothers and other financial institutions had caused the worst financial crisis in the market in 2008 since at least the 1930s"

(id. at ¶ 415).

The Devonshire Appellate Court also recognized these tumultuous circumstances. The Devonshire Appellate Court credited Leslie Rahl's view (LBIE's expert here) that:

"a number of events leading up to January 2009 had changed the economics of the CDSs and created what she [Rahl] viewed as temporarily aberrant risk premiums for CDSs in general: (i) the 17-month Standstill Agreement, an unprecedented factor in addressing issues surrounding the calculation of Early Termination payments under an ISDA Master Agreement; (ii) the 2008 financial

crisis, which led to extreme illiquidity in the market; and (iii) the temporary, but extraordinary, illiquidity in the market around January 2009"

(Devonshire Appellate Decision at ¶ 238).

Instead, the trial judge accepted Devonshire's expert's opinion that a discounted cash flow method of valuation was reasonable under the circumstances. Those circumstances included accepting the evidence that the market in early 2009 was highly illiquid (Devonshire Trial Decision at ¶ 409). Relying on this model, the trial judge valued Barclays' Loss at $12,000 but reduced it to $0 based on mitigation. In arriving at this value, the trial judge declined to adopt Devonshire's expert's view that the $12,000 figure should be increased by a $264 million risk premium.

Although the Devonshire Appellate Court would go on to reverse the calculation of Barclays' Loss, because Devonshire had not included a standardized risk premium, this circumstance is irrelevant. Here, we are not calculating LBIE's Loss (Barclays' equivalent),¹² but rather Assured's Loss (Devonshire's equivalent). The calculation of Devonshire's Loss was not appealed. The critical importance of the Devonshire Appellate Decision to this case is that decision affirmed the rejection of Barclays' market-based valuation because of the financial meltdown that existed at the end of 2008-beginning of 2009:

12 In Devonshire, the court undertook to calculate the Loss for both parties, rather than just one, for reasons not relevant here.

"Particularly given the events that occurred during the intervening 17-month period, including the 2008 financial crisis, the extreme illiquidity in the market, and the temporarily aberrant risk premiums that existed in January 2009, the operation of the Standstill Agreement rendered Barclays' model-based valuation of Loss commercially unreasonable. In normal circumstances, the special features of the swaps (including the liquidity feature, the stop-loss feature, and the limited-recourse provision) effectively capped the real value of the CDSs to Barclays on termination at the amount of the posted collateral in place at any particular time. In effect, Barclays' use of its model-based valuation was an attempt to shift the entire consequences of failing to achieve a restructuring during the Standstill on to Devonshire.

Moreover, as the Devonshire trial judge found, as of January 2009, there was simply no willing buyer and no willing seller for the CDSs at any price approximating that produced by Barclays' model. The significant inflation in risk premiums during the Standstill Period had caused the model-based value of the

CDSs to increase beyond any realistic estimate of their underlying real worth, taking account of their special features"

(Devonshire Appellate Decision at ¶¶ 271-272 [emphasis added]).

None of LBIE's cases discuss what happens when the markets are so dislocated that there are no market bids from which to derive a quotation. Devonshire addresses the exact situation involved here, i.e., the absence of an operating market during 2009. Those decisions, both trial level and appellate, dealt with a proffered valuation based on contrived market prices versus a valuation based on cash flows and involved an even greater difference than the valuations in this case. Yet, given the illiquidity and dislocated market, the court rejected Barclays' valuation based on theoretical market prices.

IV. ANALYSIS

LBIE failed to prove the existence of a uniform market practice of resorting to market prices to determine "Loss," much less Assured's Loss, which had nothing to do with market prices. By putting all its eggs in the market price basket, LBIE has failed to show both that Assured's valuation was unreasonable, and that its own valuation, whereby its was owed more than $450 million, was reasonable. Meanwhile, Assured's valuation was reasonable and calculated in good faith.

A. There was No Uniform Market Practice

As explained earlier, under the ISDA contract, because the auction had failed to produce a single bid Assured did not have to try to determine its Loss by reference to dealer quotations. Instead, Assured used a discounted cash flow analysis whereby it netted the premium payments LBIE would have owed over the life of the transactions against the amounts Assured would have had to pay to cover expected shortfalls in interest and principal on the Securities.

As already discussed, the premium amounts are not disputed. LBIE takes issue with the amounts Assured calculated to cover expected shortfalls. LBIE's primary argument is that Assured's calculation was unreasonable because it departed from what LBIE sees as a uniform market practice of calculating Loss based on market prices. Where no actual market prices are available, LBIE contends that it is industry practice to develop a model to estimate theoretical market prices using available market prices or data. LBIE then advocates for the use of the theoretical valuation its experts composed for this litigation.

LBIE came nowhere close to proving a uniform market practice to value utilizing only market prices. LBIE never explains away cases, such as Devonshire, where the court soundly rejected a valuation based on theoretical market prices for similar securities during the same time period of market disruption at issue in this case. Moreover, a review of the evidence reveals that, particularly at times of extreme market disarray, there was no consensus on valuation methods, because prices became divorced from value (see Bear's Lair 2009, AX 50056 at 25-26 [finding "that current market prices of ABX.HE are inconsistent with any reasonable assumptions for future default rates" such that there is "serious doubt on the current practice of using these securities to mark portfolios of subprime mortgages to market"); BOE Oct. 2008 Report, AX-50072 at 11; BIS March 2009 Working Paper, AX-50019 at 19 [identifying factors that "may limit the usefulness of ABX price quotes for valuation purposes and as indicators of future write downs and losses by ABX investors" and stating that "default-related losses on subprime MBS instruments . . . may ultimately turn out to be significantly lower than recent ABX prices would seem to imply"]; Cohn, "Bruised but Best in Show," AX 90199 ["(I)n a distorted market, finding an accurate means of calculating damages may be difficult."]; see also Anthracite Rated Invs. (Jersey) Ltd. v Lehman Bros. Finance S.A. [2011] EWHC 1822 (Ch) [Eng.] at ¶ 84 [noting "the valuation and liquidity difficulties affecting hedge fund portfolios" in 2009]; Firth Derivatives Law and Practice [2021], AX 90021 at 211 ["Where there is no available market for a replacement transaction, it may not be possible to establish Loss by reference to market price."]).

Even some of LBIE's own experts have utilized different valuations in other cases. For example, in Devonshire, that again involved an ISDA Master Agreement containing the same definition for "Loss," Leslie Rahl, LBIE's own expert, did not rely on prevailing market prices (see AX 90026 at 8 [Rahl expert report in Devonshire]). Instead, she factored in many of the same circumstances that Assured used here, including the disrupted market conditions in 2009, and came up with a normalized risk premium that did not rely on market prices. In Devonshire, Rahl noted that in January 2009, the disparity between a cash flow valuation and a mark-to-model valuation was quite large and was "the subject of much debate" (see Devonshire Trial Decision ¶ 239 [emphasis added]). The "subject of much debate" implies the opposite of a uniform market practice.

In addition, Professor Niculescu, LBIE's primary valuation expert, performed a valuation similar to what Assured performed here in Bank of New York Mellon Tr. Co., N.A. v Solstice ABS CBO II, Ltd. (910 F.Supp.2d 629 [SDNY 2012]; see also Bank of New York Mellon Tr. Co., N.A. v Solstice ABS CBO II, Ltd., 2012 WL 13070212, at *7 [SDNY Mar. 28, 2012]), albeit under circumstances far different and perhaps without real disagreement as to methodology. Nevertheless, this circumstance undercuts LBIE's argument that there was a standard practice. Indeed, Dr. Niculescu explained that he used this analysis in Solstice because "there were no market prices available" and because the "swap in question . . . was not tradeable, it was embedded in a particular structure, it was unique . . . . These were bespoke and non-tradeable" (Tr. at 1767-1768). But the Transactions here involved bespoke (monoline specific) terms and were not tradeable, as the lack of bids at the auction demonstrates.

Also, LBIE never explains how this purported uniform industry practice could have possibly worked in the first half of 2009 given the extreme dislocation in the market and the extreme illiquidity. It was these circumstances that led the Devonshire court to reject Barclays' valuation based on market prices. Nor does LBIE explain how a uniform industry practice of resorting to market prices could ever work to approximate Assured's Loss as a monoline insurer that insured payments over the life of the Transactions. LBIE did not cite to a single case where a court used a theoretical pricing model to calculate Loss for transactions with economic terms similar to those here.

As discussed earlier, LBIE's attempts at novation and the indicative bids LBIE obtained are irrelevant (see discussion, infra). So, too, is the evidence of private settlements with other monoline insurers. There is no evidence those insurers protected the same AAA level securities,¹³ under the same terms, such as pay as you go, lack of collateralization, etcetera. More importantly, LBIE does not point to any monoline settlement where the monoline was not the defaulting party, such that it was the counterparty of the monoline whose loss was being calculated. Here, Assured, a monoline, is the non-defaulting party and therefore it is Assured's Loss that needs to be calculated, not LBIE's.

13 To the contrary, other monolines insured far riskier tranches of asset backed securities (Rosenblum Tr. at 1229).

Finally, LBIE's settlements with other entities, who were NOT monoline insurers and that had contracts with materially different terms, are irrelevant. Although these other entities, including other investment banks, may have settled based on what they may have viewed as market prices (we do not really know), it does not mean Assured's calculations were unreasonable, especially as many of the others involved collateralized CDS and involved physical settlement, making them irrelevant to the court's analysis. The Transactions here were not collateralized and did not involve physical settlement.

B. LBIE's Speculative Model Constructed Hypothetical Market Prices

LBIE continues that, even if there were not a uniform practice, Assured's Loss calculation contradicted available market prices and was therefore wrong. To prove its point, LBIE interposed a valuation model, that Dr. Niculescu created out of whole cloth, that attempted to calculate a hypothetical market price based on various pricing proxies.

Despite Dr. Niculescu's detailed and interesting valuation, it has no application to the real world at the time. Rather, the evidence at trial demonstrated a total lack of a market for the securities at issue in this case. That LBIE's experts had to create market prices through increasingly speculative projections reflects this lack. That no market participant bid at the auction is strong evidence that there was no market and no way of pricing these Transactions.

This case is on all fours with Devonshire in all relevant respects. In Devonshire, the Appellate Court rejected Barclays' valuation based on market prices because "Barclays' use of its model-based valuation as of January 13, 2009 produced a commercially unreasonable result (Devonshire Appellate Decision at ¶ 285). The Devonshire Appellate Decision found Barclays' valuation to be commercially unreasonable because:

"[a]pplying quite different market circumstances 17 months later, in circumstances where liquidity calls, collateral calls and stop-loss features were suspended in the intervening period, departs from the original intent of the ISDA Master Agreement. Particularly given the events that occurred during the intervening 17-month period, including the 2008 financial crisis, the extreme illiquidity in the market, and the temporarily aberrant risk premiums that existed in January 2009, the operation of the Standstill Agreement rendered Barclays' model-based valuation of Loss commercially unreasonable. . . In effect, Barclays' use of its model-based valuation was an attempt to shift the entire consequences of failing to achieve a restructuring during the Standstill on to Devonshire. Moreover, as the trial judge found, as of January 2009, there was simply no willing buyer and no willing seller for the CDSs at any price approximating that produced by Barclays' model"

(Devonshire Appellate Decision at ¶ 272).

The contractual terms, the gap in time between the event of default and termination, the market dislocation, and the failed auction that led the Devonshire court to reject Barclays' valuation are all present in this case. Thus, as the court did in Devonshire, this court rejects LBIE's contention that there was a standard industry practice to use market prices when the market itself was in total disarray, such that the auction for the very Securities at issue did not receive even one bid. At bottom, there just was no market to generate prices. The theoretical prices that LBIE's experts come up with are just that - theoretical. Like the Devonshire court concluded, if there is no market for the securities, and dislocation divorces prices from value, then there is no basis upon which to construct a market.

C. Market Prices Were Irrelevant to Assured's "Loss of Bargain"

Even if there were a market, the ISDA Master Agreement did not require Assured to calculate Loss using available market prices or data: "[a] party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets" (ISDA Master Agreement at 15 ["Loss Definition"] [emphasis added]). Rather, the ISDA Master Agreement allowed Assured to calculate its loss in any commercially reasonable manner (see Intel, 2015 WL 7194609, at *11 [Bankr SDNY Sept. 16, 2015]).

Moreover, Assured's "Loss" had nothing to do with market prices because Assured is a monoline insurer. Unlike LBIE, it was not in the business of trading and making a profit on the Securities. Its income derived from the premiums minus what it would have to pay to cover payment shortfalls in the Securities. Because Assured had an obligation to cover shortfalls over the life of the Securities, what mattered in calculating Assured's Loss was the rate of defaults of the underlying loans feeding these Securities, not the market value of the instruments. Therefore, the worth of the Transactions in the market is utterly irrelevant to Assured's Loss.

A theme running through some of the legal decisions is that market quotation and Loss are supposed to reach broadly the same result (see e.g. Peregrine; Anthracite; the S/J Decision). However, it is not at all clear to this court why this should be the case. Nothing in the 1992 ISDA Master Agreement directs this. After all, we are measuring the "loss of bargain" of a non-defaulting party who had a completely different role than its counterparty. Here, LBIE's valuation, a contrived proxy for market quotation, actually puts Assured in a worse position than if the Transactions had not been terminated. Assured would be required to make a huge payment to LBIE in one lump sum, rather than paying over time. It would have no replacement transaction and would have lost the cash flow from the premiums. How then does LBIE's valuation measure the loss of bargain to Assured, the non-defaulting party? If Assured's method, which relies heavily on projected defaults, is applied, it simply receives the cash flow it would have received had the Transactions not been terminated. Therefore, LBIE misses the point in asserting that LX 355, an internal Assured document meant to comply with FAS 157, and LX 170, reflecting certain calculations for Assured's GAAP accounting, is proof that Assured had no problem obtaining market prices for its own internal purposes. Assured was to calculate its own loss of bargain, not LBIE's. LX 355 was for a completely different purpose. LBIE keeps forgetting that once the auction failed, Assured was entitled to resort to Loss methodology that "NEED NOT" utilize market prices.¹⁴ These valuations were for another purpose, i.e., to comply with GAAP for reporting obligations.

14 If the court considers LX 355 and 170, then, in all fairness, it should also consider LBIE's valuation memo demonstrating that trades were worth nothing to LBIE due to the pay as you go structure (JX-67). However, all these documents are unnecessary to the conclusion the court reaches today.

Thus, LBIE's valuation was commercially unreasonable under the circumstances. Because Assured insured the payment flow of the Transactions, not their market value, the Loss to Assured depended on how the Transactions actually performed. This in turn depended on the rate of default of the underlying loans, NOT on the market prices for the Transactions. LBIE's valuation is therefore irrelevant to Assured's Loss and actually puts Assured in a worse position than had the Transactions never terminated.

D. Assured's Valuation

Having put all its eggs in the market price basket, LBIE is left to quibble with Assured's discounted cash flow valuation. As explained earlier, Assured used actual market data for the specific Transactions at issue, available through Intex, an industry standard platform, to come up with a default rate of 28%. From there, Assured calculated that it would owe LBIE about $27 Million on the ABX transactions and nothing on the rest.

For example, LBIE complains that the information from Intex that Assured used was stale because it was based on data from the second half of 2008 and, therefore, Assured's liquidation rate was inaccurate.¹⁵ However, as Rosenblum, Assured's Chief Actuary, explained, the liquidation rate is merely an outcome of Assured's initial default rate. This, as Rosenblum testified, was based on current performance data reflecting actual delinquencies as of 2009 (Tr. at 1265-1268). Moreover, it stands to reason that liquidation rates do not change much over time, because that rate depends largely on how fast a bank can foreclose (id. at 1259).

15 The default rate is the percentage of the asset class that defaults, and the liquidation rate is percentage recovered (see Rosenblum Tr. at 1159-1160).

LBIE also complains that Assured's loss severity curve of 70% was too low. However, the record demonstrated that Assured's calculation was smack in the middle of the other potential rates. For example, JP Morgan and Moody's reported using lower rates (Prager Tr. at 3065-3068). Meanwhile, plaintiff's expert, Dr. Niculescu, unreasonably picked the absolute highest loss severity rate of 75% among all the market participants. Professor Niculescu also looked back too far at the falling housing market. While the housing market had been falling consistently since 2006, Dr. Niculescu ignored that housing prices were showing signs of recovery by mid-2009 (see e.g. Case Schiller report [AX 90198]; Moody's August 2009 report [AX 50044]). He also projected losses all the way to 2020. This was unrealistic (see Prager Tr. at 3019 [testifying this period was significantly longer "even though it was already known the recession was over"]).

LBIE complains that just about everyone else, including the ratings agencies, had liquidation and default rates higher than Assured. Remember, Moody's had a default rate of 30%, S&P had a default rate of 32%, and Fitch had a default rate of 39%, compared to Assured's default rate of 28%. This discrepancy is significant in that a couple of percentage points makes a difference of hundreds of millions of dollars. However, the discrepancy is insufficient to amount to being legally unreasonable (Prager Tr. at 3344 [testifying that Moody's and Assured's default rates were not materially different]). This is because the valuations here are subject to projections based on assumptions about how the market would perform. Assured made the assumptions that the housing market would recover by 2012 and that most of the borrowers who were going to default had already done so (seasoning). In reaching these conclusions, Assured relied on actual market information from Intex, an industry standard platform, as to how the very Securities at issue were performing at the time. Thus, Assured made reasonable assumptions as to how the loans would perform in the future, based on that data and taking into consideration how these pools of mortgages performed historically.

Assured also took into consideration that these instruments had significant structural protections, largely due to their senior tranche, AAA status. There were further structural protections at the individual mortgage level that Assured also took into account, including that most of the loans covered only 80% of the home value, such that that 20% could be recovered in a foreclosure. On the pool level, Assured took into account protections, such as excess spread. Finally, Assured also took into account that the non-ABX trades maintained investment grade status throughout the crisis.

Under the ISDA agreement between the parties, once the auction failed, Assured was well within its rights to calculate using the Loss method, without resorting to market prices. Assured was to calculate its own loss, NOT LBIE's. To calculate its own loss, Assured merely used the same models it used throughout its business. The projections it made relied on reasonable assumptions that many others in the market had made. Assured took into account data from Intex for the specific Transactions at issue and also took into account the significant structural protections inherent in them. Thus, Assured demonstrated prima facie that its calculations were reasonable and in good faith.

LBIE never addresses the structural protections that Assured's experts discussed at trial. All LBIE asks for at the end of its opening brief (EDOC 777 at 74) is that this court alternatively average the highest default rates from certain banks (including Barclays' inflated number), throwing in Fitch and S&P's numbers to round it out. Predictably, LBIE does not include the lowest 30% default rate from Moody's that was so close to Assured's 28%. In the 11 years this case has been pending, LBIE never asked for this alternative valuation. Instead, it staked its position on unreasonably high numbers that bore no relation to reality. This does nothing to refute Assured's prima facie showing that the 28% was reasonable, even though Assured's rate was somewhat lower than rates from Moody's and S&P. It was ultimately reasonable to assess a default percentage slightly lower than the ratings agencies, because of the structural protections inherent in these instruments about which Assured's experts testified. Because LBIE never adequately addressed the structural protections on these securities, it failed to rebut Assured's prima facie showing, despite Assured's default rate being slightly lower than the rates from the ratings agencies. The court has considered LBIE's remaining contentions and finds them unavailing.

Accordingly, after trial, the court finds in favor of Assured. The parties are to attend a conference on March 20, 2023, at 11:00 a.m. over Microsoft Teams, to discuss next steps, including entry of judgment and calculation of attorney's fees.