Insurance commissioner takes control of $35 billion in mortgage securities [Milwaukee Journal Sentinel]

Mar. 25--Wisconsin's insurance commissioner has taken control of $35 billion worth of shaky mortgage-related liabilities from bond insurer Ambac Assurance Corp., a move intended to help stabilize the struggling company.

The action by Insurance Commissioner Sean Dilweg puts Wisconsin at the center of an effort to salvage the best outcome from a troubled book of business involving the sorts of complex financial instruments that helped precipitate the nation's economic meltdown in 2008.

The case, Dilweg said in a court filing, embraces "incredibly large" amounts of financial exposure.

But while it involves a large New York bond insurer, it will play out in Wisconsin because Ambac's corporate parent, publicly traded Ambac Financial Group Inc., was founded and incorporated here -- an outgrowth of what is now MGIC Investment Corp., the Milwaukee-based mortgage insurer.

With Ambac still "domiciled" in Wisconsin, Dilweg wields a great degree of regulatory authority over the company. And while he manages what he hopes will be the rehabilitation of Ambac's troubled business, the case will be overseen by Lafayette County Circuit Judge William D. Johnston.

Johnston has long handled insurance rehabilitation proceedings in Wisconsin and has developed expertise in the arcane field, Dilweg said in a court document.

Dilweg seemed to anticipate questions about whether officials in Wisconsin -- and a judge on Main Street in Darlington (population 2,212) -- would be in over their heads with Ambac. On a Website directed at Ambac policyholders, he said Wisconsin "has a long history of successful insurance regulation and has rehabilitated and restructured a number of insurance companies over the decades."

He acknowledged that previous rehabilitations have involved companies far smaller than the current case, but said the commissioner's office has closely monitored Ambac for more than two years, "has done its homework and it's prepared."

Temporary moratorium

Not all of Ambac's business is going into rehabilitation under the oversight of Dilweg and Johnston. Rather, Dilweg is establishing a segregated account for the most troubled Ambac contracts. He is imposing a temporary moratorium on further claims payments to holders of policies tied to those contracts. All policies will remain in force, he said.

"I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities, who rely on AAC's guarantee," Dilweg said in a statement. "I have a concrete plan for rehabilitation, and details will be reviewed in court over the coming weeks." AAC is the abbreviation for Ambac Assurance Corp.

Ambac Assurance's business involves guaranteeing payment of the obligations of municipalities and companies that borrow money by issuing bonds. If the issuers default, Ambac must make good on paying their interest and principal.

The subsidiary's troubles have imperiled corporate parent Ambac Financial, which sketched a grim picture of its situation in its most recent quarterly financial report to securities regulators, filed Nov. 9.

It said Ambac Assurance, its main subsidiary, hasn't written a meaningful amount of financial guarantee business since November 2007, and wrote none last year. With the bond unit reeling, Ambac Financial has received "multiple downgrades" of its financial strength rating from the Moody's and Standard & Poor's services.

Ambac Financial depends on money generated by Ambac Assurance, and with the partial takeover by Dilweg, it is "highly unlikely" the subsidiary will be forwarding any payments to Ambac Financial for the foreseeable future, the company said.

As it has said in recent months, Ambac reiterated Thursday that it may seek bankruptcy protection as it tries to reorganize its financial affairs.

Class-action lawsuit

Dilweg's office has been monitoring Ambac Assurance's capital position and financial health since the subprime mortgage crisis began pulling down the economy more than two years ago. The economic downturn, combined with Ambac's substantial involvement in insuring mortgage-backed securities, damaged its business and reduced its resources for paying claims, the insurance commissioner said.

Policies that are not transferred to the segregated account being established by Dilweg will remain under Ambac Assurance Corp., the commissioner said.

In a class-action lawsuit filed by Ambac Financial investors after the collapse of the firm's stock, stockholders such as pension funds portrayed Ambac as a company that shifted its model from a top-rated insurer of municipal bonds to a player in the riskier world of mortgage-backed securities and other financial instruments during the housing bubble. As a result, the suit says, Ambac "became the ultimate holder of the risk for billions of dollars of mortgages." The federal lawsuit in New York contends Ambac lowered its standards, and when the housing crisis occurred, Ambac was left insuring "low-grade loans" to mortgage borrowers.

"By insuring instruments backed by underperforming loans, Ambac dramatically increased its risk of incurring crippling losses, a fact unknown to the investing community until the company was forced to take billions of dollars in mark-to-market losses and loss reserves," the lawsuit assets.

Ambac contends it didn't mislead investors.

Ambac Financial's stock price has been crushed by the firm's troubles. Shares of Ambac, which traded around $96 as recent as spring of 2007, were trading at 60 cents Thursday.

Bloomberg News contributed to this report.

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