Judge should rule MBIA split was rational, NY says

* Lawyer for NY insurance dept says no trial needed

* Says dept decision to OK MBIA split was "rational"

* Tells judge dept cleared bar with room to spare

By Karen Freifeld

NEW YORK, May 21 (Reuters) - New York's state insurance regulator made a rational decision to approve the restructuring in 2009 of bond insurer MBIA Inc, a lawyer for the state said on Monday.

David Holgado, the lawyer representing the department, said New York state Supreme Court Justice Barbara Kapnick should uphold the department's decision.

The attorney was making the department's case in the second week of a proceeding in which two banks, Bank of America Corp and Societe Generale, have sued MBIA and the insurance department to overturn the restructuring.

The banks say that, as policyholders, they were harmed when MBIA split its troubled mortgage-debt insurance business from its traditional municipal-bond insurance business, siphoning $5 billion from the unit that insured mortgage debt.

The insurance department must meet a "low bar" to prevail, Holgado, who is representing the state insurance department and its superintendent at the time, Eric Dinallo, said in his opening statement in court Monday.

Kapnick need only determine whether the decision to approve the restructuring was rational, Holgado said, not whether it was right.

"The department cleared that bar with room to spare," Holgado said. "This case is now ripe for summary adjudication."

The banks, whose lawyers gave their opening statements last week, said the split must be annulled because MBIA provided inaccurate and misleading information to obtain approval.

Holgado said the restructuring was approved after a more-than-adequate review.

In late 2007, he said, as the financial crisis began, insurers like MBIA began to suffer significant losses and the market for municipal bonds became frozen.

At first, Holgado said, the insurance department thought MBIA, with its AAA credit rating and capital infusions, would be able to issue policies and help unfreeze the market.

That changed in June 2008, the lawyer said. MBIA was downgraded, and it became unlikely the insurer, which is based in Armonk, New York, would be able to write new business unless it restructured itself.

The "paramount concern" was whether MBIA would have the ability to pay its claims as they came due after the restructuring, Holgado quoted Dinallo as saying.

Lawyers for MBIA will present their opening statements after the state. The case, which began May 15, is expected to last two to four weeks.

The case is ABN Amro Bank NV et al v. Dinallo, New York State Supreme Court, New York County, No. 601846/2009.