Originally, 18 banks challenged Dinallo's approval in an Article 78 proceeding before Justice Barbara Kapnick, arguing that the financial-securities business—which remained MBIA—lacked adequate reserves to cover losses.

The proceeding, which began in May 2012, lasted four weeks, but dragged on until this week when the judge finally made her decision. Prior to the proceeding, most of the banks challenging the insurance department's decision dropped out, leaving Bank of America and Societe Generale as the only remaining plaintiffs.

While the judge was making her decision, Bank of America attempted to purchase some of MBIA's debt, which the carrier firmly rebuffed calling it an interference in the company's affairs.

MBIA CEO Jay Brown said the court's decision “affirmed what was obvious all along”—that the insurance department's decision was “proper in all respects.”

Bank of America says it plans to appeal Kapnick's decision.

Yesterday, the subsidiary created to handle municipal-bond guarantees, National Public Finance Guarantee Corp., said it has approximately $100.7 million of insured exposure to the general-obligation debt of the city of Detroit.

The city has fallen on hard times. Michigan Gov. Rick Snyder plans to take over the city's finances as Detroit struggles to get out of $14 billion in debt obligations and deals with more than $300 million deficit.

National Public's Chief Risk Officer Adam Bergonzi says that, should Detroit fail to make required debt service payments for any reason, including bankruptcy, the insured bondholders will receive guaranteed interest and principal payments “on time and in full.”

National Public has close to $2.4 billion in exposure to various city of Detroit bond issues secured by distinct revenue streams such as water and sewage authorities.

This is not the first municipal-bond crisis National Public has dealt with since the start of the recession. In July, the carrier said it had $33 million in bond exposure to the city of San Bernardino, Calif., which is still seeking to steady its finances and pursue bankruptcy protection. This was in addition to $224 million of municipal-bond exposure from the city of Stockton, Calif.

National Public has said it has approximately $5.7 billion in claims-paying resources.

Corrections: The mortgage backed securities were placed with MBIA Insurance Corp. not MBIA Inc. The Article 78 proceeding was not a trial but a hearing that involved no witnesses. The 16 banks involved in the original complaint pulled out prior to the beginning of the proceeding. Bank of America did not attempt a takeover of MBIA, but did attempt to purchase some of its debt.