Ambac may seek bankruptcy after regulators step in

NEW YORK -- Bond insurer Ambac Financial Group said again that may seek bankruptcy protection after state regulators took control of some of the company's most troubled assets.

The news Thursday sent the company's already devalued stock into a tailspin.

The Wisconsin insurance commissioner on Wednesday ordered the company's main operating subsidiary, Ambac Assurance Corp., which is based in that state, to set up a segregated account for policies related to risky structured finance transactions. Those include the credit default swaps and residential mortgage-backed securities held by major Wall Street banks that helped to accelerate the national financial crisis.

Commissioner Sean Dilweg is seeking to take control of the segregated account, and received court approval to temporarily halt any payments on claims on those policies. Ambac was paying $120 million a month in claims on the policies.

Dilweg said the action was taken "to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities, who rely on AAC's guaranty."

The commissioner said he has a plan to address policy claims and other liabilities in the segregated account, which will go before a special court for approval. After the moratoriam period on payments is passed, it is expected that policyholders will receive a percentage of their claims in cash and the remaining percentage in deferred payment obligation.

Ambac Financial, as it did in November, said that it believes it has enough cash to get through the second financial quarter of 2011. But it is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac Financial in the foreseeable future while the policies in the segregated account are dealt with.

The company said it may consider restructuring its debt through a prepackaged bankruptcy proceeding, or seek bankruptcy protection if it cannot reach a deal with major creditors.

Bond insurers such as Ambac make money by backing municipal bonds that rarely default. They typically pay steady dividends, with little risk. But during the housing market boom, lenders started issuing riskier mortgages and investment banks packaged them into complex bonds.

For insurers like Ambac and several competitors, the new bonds were an opportunity to generate enormous profit, just like investment banks were seeing. But when the housing bubble burst, the claims on bond insurance came rolling in.

Ambac Assurance is backing the segregated account with $2 billion of notes that will be used to help pay claims.

Ambac has a separate pool of risky obligations _ collateralized debt obligations of asset-backed securities _ that was not put into the segregated account, because it reached a non-binding agreement on the terms of a settlement to commute them. "We're in the process of negotiating to tear those up," said spokesman Peter Poillon.

The parent company said it doesn't think the creation of the segregated account or Wisconsin's plans for its rehabilitation _ paying down or settling the obligations _ constitutes a default under the terms of its lenders.

The parent company last filed financial results in September, posting losses of $573 million for the third quarter 2009. Earlier this month, Ambac said it was unable to file fourth-quarter or full-year 2009 results because of the ongoing discussions regarding with the Wisconsin insurance commissioner and the pool of CDOs it is negotiating to commute.

It posted 2008 losses of $5.6 billion, but said in a regulatory filing 2009 results would be "significantly better."

The Wisconsin insurance commissioner set up a Web site linking to court papers and questions and answers about the segregated account and the proceedings, http://www.ambacpolicyholders.com.

Ambac's stock traded over $95 a share just two years ago, but hasn't topped $2.09 in the past 52 weeks.

In heavy trading Thursday, shares of Ambac Financial Group Inc. dropped 17 cents, or 21.5 percent, to 62 cents.