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, 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.

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(MBI) - Get Report

, 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.



(JPM) - Get Report

, 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) - Get Report

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.

Ambac last September said it couldn't cover collateral requirements for guaranteed investment contracts, or GICs, in the event of a further downgrade. Then in April, Moody's did just that, yet nothing happened. Wallis dismissed the latest cut in May, saying, "This is not to say that familiarity breeds contempt, but is to say that any impact upon our markets, operations or stakeholders is relatively minor."

Liquidity isn't the biggest issue. Total cash and short-term securities were $178 million, or more than 1.5 times the annual debt service at the end of the first quarter, according to Ambac. The company does, however, have serious problems with insurance regulators, acknowledging in May that it's not in compliance with surplus and capital requirements. Ambac now must submit a remediation plan.

TheStreet.com Ratings gives Ambac a D-minus, or "sell," rating.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.