A group of major banks including Citigroup Inc , JPMorgan Chase & Co and Barclays Plc has sued MBIA Inc , charging that the bond insurer illegally restructured its operations by moving $5 billion of assets and leaving a key unit effectively insolvent.

The group of around 20 financial institutions and affiliates are seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds, but did not put a value on such claims.

MBIA, along with rival bond insurer Ambac Financial Group Inc , suffered huge losses in the recent financial turmoil as they were hit by claims on insurance policies they issued on repackaged debt, which turned out to be more risky than they assumed.

A spokesman for MBIA, which reported a profit of $697 million last quarter, declined comment on the lawsuit, which was filed on Wednesday in New York State Supreme Court.

The company's shares fell 9 percent in after-hours trading to $5.16, after falling more than 7 percent in regular trading on the New York Stock Exchange.

In the suit, the banks charge that MBIA acted illegally when it created a new municipal-bond insurance business earlier this year, making it free of its contractual obligations to policyholders.

As a result of moving $5 billion in assets, the banks said in their court documents, that MBIA Insurance -- the operating unit which pays claims -- is now effectively insolvent with no means of paying claims.

The banks claim that MBIA could instead have used its own cash to strengthen the balance sheet of MBIA Insurance, but it chose to spend more than $900 million repurchasing its own stock and debt and lending money to its asset management business. As a result, the suit claims MBIA executives will benefit while policyholders are left facing losses.

Other major banks party to the suit include units of: ABN Amro, BNP Paribas ; HSBC , Bank of America Corp , Morgan Stanley , Royal Bank of Canada , Societe Generale, UBS AG and Wachovia Bank.

(Reporting by Bill Rigby; editing by Carol Bishopric)

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