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Ambac Is Pushed Closer to Bankruptcy

Stocks in this article: ABK MBI

NEW YORK ( TheStreet) -- Bond insurer Ambac Financial Group (ABK), whose shares are trading for less than $1, moved closer to bankruptcy as an insurance regulator took control of $35 billion of its main subsidiary's liabilities.

The Wisconsin Office of the Commissioner of Insurance (OCI), which regulates the subsidiary, filed a petition for what's called rehabilitation with a Wisconsin County Circuit Court yesterday, meaning it wants to take control of the insurer's operations. It demanded the segregation of accounts between parent company Ambac Financial and Ambac Assurance Corp., the subsidiary, be established to provide a "durable solution for all policyholders."

Ambac has been teetering on the edge of bankruptcy for months after it was forced to pay billions of dollars on claims following the financial crisis. Ambac's collateralized debt obligations (CDOs) on asset-backed securities (ABS) lost the most value. Ambac's shares fell 22% to 62 cents in New York trading today.

"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 Ambac Assurance Corp.'s guaranty," said Sean Dilweg, Wisconsin's insurance commissioner.

Dilweg said he's made plans for the rehabilitation that "will be reviewed in court over the coming weeks." The order doesn't place Ambac Assurance into rehabilitation. If it were, that would essentially mean the parent company would go bankrupt.

A frustrated Ambac Chairman Michael Callen, who had hoped to revive the bond insurer as the economy pulls out of a recession, said the company's "compliance with the direction of OCI to establish the segregated account of Ambac Assurance and to consent to the terms of the proposed settlement agreement of our CDO of ABS portfolio is the best alternative available."

Ambac's failure to agree to the terms of the Office of the Commissioner of Insurance would have led to an immediate seizure of Ambac Assurance and the inevitable bankruptcy of the parent company. In other words, Ambac had little choice in the matter as Callen's time ran out.

According to Ambac, assets moved to the segregated account include most policies insuring or relating to credit default swaps, all residential mortgages-backed securities (RMBS) obligations, policies insuring troubled credits, some student loan policies and other contingent liabilities including Ambac Assurance's liabilities as a reinsurer.

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