Is It Safe? Ambac Relaunch May Misfire

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Ambac(ABK Quote), the second-largest U.S. bond insurer, posted a $392 million loss in the first quarter after a $1.7 billion loss in 2008.

The New York-based company's stock tumbled to 38 cents in March from a high of $96 in May 2007. Short interest, representing those betting on a further decline, stands at 14.9% of the outstanding shares.

The word "perilous" comes to mind.

MBIA(MBI Quote), Ambac's biggest rival, is trying to secure its future by splitting off bad from good assets and liabilities. It's now facing lawsuits to reverse that decision. Ambac took another approach: It decided to create Everspan with the aim of launching a municipal-only guarantor.

Ironically, JPMorgan(JPM Quote), one of the companies suing MBIA, is itself being sued by Ambac, along with others, over charges of misrepresenting its loan book. Ambac says it will recover at least $500 million.

The success of the launch of Everspan depends on David Wallis, CEO of Ambac, in attracting outside investors. Everspan needs at least an "AA" rating. It won't receive a better rating without a suitable ring-fencing operation.

The inability to re-enter the municipal bond market, with new entrant Warren Buffett's Berkshire Hathaway(BRK.A Quote) clearly seeing opportunities, would lead to a face plant for the business. (Ambac already discontinued its investment and derivative operations in 2008.) Tapping into the muni-bond market could prove to be extremely profitable and save the bond insurer.

During the first-quarter earnings conference call, Wallis confirmed there were interested parties, but he seemed frustrated at the terms that were offered.