Wisconsin Regulators Take Over Ambac’s Bad Assets

Ambac Financial Group, Inc. is finding some of its bad assets under the control of Wisconsin state regulators today. Ambac doesn’t have enough money to pay out on about $35 billion in insurance contracts. Regulators are forcing the company to put the failing contracts in a separate account, where they can then dispose of them. Reuters has the story:

“I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities,” Wisconsin Insurance Commissioner Sean Dilweg said in a statement.

The segregated account will include guarantees against default that Ambac sold on mortgage securities, repackaged consumer loans known as collateralized debt obligations of asset-backed securities, and other instruments. Ambac Assurance Corp (an Ambac business unit) will put $2 billion of notes into the segregated account, which will in turn be used to help pay claims. The Wisconsin Office of the Commissioner of Insurance (OCI) will administer the segregated account. Any losses will still be borne by Ambac.

Bond insurers like Ambac charge bond issuers a fee and in exchange guarantee bonds against default. If guaranteed bonds do default, Ambac must step in to make interest payments and ultimately repay principal.

Ambac’s capital levels have become severely strained by the mortgage crisis, which forced it to make big payouts on a number of complicated repackaged mortgage bonds and other instruments. Bond insurers broadly suffered from making big bets on the mortgage market, which took them away from their main business of guaranteeing bonds issued by states and cities.

Ambac is negotiating settlements with several major contract holders.

Unsurprisingly, the company might also file for bankruptcy.