Ambac To Pay Banks $2.6 Billion: Lawyers Pack Small-Town Courtroom

May 26--DARLINGTON -- A deal to pay 14 of the world's largest banks $2.6 billion as part of the restructuring of Ambac Assurance Corp. was approved Tuesday by a Lafayette County circuit court judge.

The deal -- the first in what will be a long and complicated case -- will provide the banks about $2.6 billion in cash and $2.6 billion in debt. Ambac owes the banks a total of $12.9 billion.

The deal was brokered by state Insurance Commissioner Sean Dilweg, who is controlling about $67 billion in troubled insurance policies issued by Ambac, a company that created the business of insuring municipal bonds but in recent years branched out to the high-risk world of insuring bonds backed by subprime loans.

After a 3 1/2 -hour hearing in a humid courtroom packed with 50 lawyers from across the country, Circuit Judge William D. Johnston ruled in favor of Dilweg and Ambac and against bondholders who objected to the deal. Objections were raised by bondholders who owned securities backed by subprime loans and by bondholders who financed the construction of a monorail in Las Vegas, a project now in Chapter 11 bankruptcy.

"I give great deference to the role of the commissioner of insurance" and the expertise of the office, which has been working with Ambac for more than two years, Johnston said.

Johnston's ruling allows payments to banks including Citibank, The Royal Bank of Scotland, Barclays Bank and Banco Bilbao Vizcaya Argentaria, a Spanish banking conglomerate.

"I'm very happy with the decision," said Dilweg, whose employees and consultants have spent thousands of hours working on the Ambac deal. "The steps we're taking here are aimed at preventing billions of dollars of losses."

When Dilweg took control of Ambac's troubled assets, the move was meant to deal with the company's high-risk policies while keeping separate -- and protecting -- its much safer lines of business, including its insuring of conservative and highly rated municipal bonds, valued at about $285 billion.

Though the company's headquarters are in New York, the case is being heard in Wisconsin because Ambac -- a spinoff of what is now MGIC Investment Corp. -- remains domiciled in this state. It is regulated by the state Office of the Commissioner of Insurance.

Johnston is the go-to judge for Wisconsin insurance delinquency cases, and his rulings in the 103-year-old courthouse have far-reaching consequences.

Opponents called the bank payment plan unfair and said they should have been given more time to study it and raise objections.

"The proposed ... settlement would turn Wisconsin's well-established priority rules on their head," said a brief filed by Madison attorney Noreen Parrett and the New York firm of Kramer Levin Naftalis & Frankel. "It would treat the claims of the ... banks more favorably."

But Michael B. Van Sicklen, part of a Foley & Lardner team representing the insurance commissioner, argued in favor of the deal.

Van Sicklen began his 45-minute argument with an observation about the high-caliber legal power that had gathered in this small city about 90 minutes southwest of Madison.

"I doubt this venerable courthouse has ever had a billable hour like today," Van Sicklen said.

Calling the motion hearing the "defining crossroads" of the case, Van Sicklen warned that if Johnston ruled against the deal, or even delayed action, the result could be costly and disastrous.

If approved, he predicted that a larger "rehabilitation plan" for the $67 billion would be in place by this summer.

If not, the case will be "mired in contentious second guessing of the Insurance commissioner ... and more billable moments, just like today."

The case is so complex that even determining the value of Ambac assets required the firm to hire BlackRock Solutions, an expert in appraising complex financial products. Much of its work remains confidential.

To put the case into perspective consider: The Ambac case involves $67 billion; the city of Darlington's annual budget is about $1.7 million.

Tuesday's ruling was one step in a process that is expected to take months if not years to complete, and bring the legions of out-of-town lawyers back to Darlington.

Although the ruling had the attention of Wall Street and the international banking community, few in this town of about 2,200 seemed to be aware of the case.

"I saw all of the Armani suits, so I knew something was up," cracked one Lafayette County sheriff's deputy.

When courthouse maintenance man Thomas VanMatre heard about the pricey lawyers about to arrive, he knew just what to do.

"That's why I'm changing the light bulbs" in the dome of the courthouse rotunda, he said.

A couple of hours later the third floor rotunda outside of Johnston's courtroom was packed with dozens of lawyers from across the country. The lights in the dome glowed brightly as the lawyers chatted and conducted business via laptops, Blackberries and mobile phones.

The small town's mayor was pleased that a multibillion-dollar case was being argued in his city.

"That's great news," Mayor David Breunig said when told of the hearing. "My daughter works at the (Riverwood) restaurant so she'll be happy."

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