Succumbing to billions of dollars in losses from the mortgage-fueled financial crisis, Ambac Financial Group Inc. announced on Monday that it filed for bankruptcy protection from creditors.
Ambac said it filed for a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. At the end of June, the company owed $1.622 billion in debt.
The company also said it failed to agree on a pre-packaged bankruptcy with a committee of senior debt holders. That may mean Ambac spends longer in bankruptcy court.
However, Ambac also noted that it agreed to a non-binding term sheet that will serve as a basis for further negotiations with the debt holders.
“That may allow the Company to emerge from bankruptcy more expeditiously,” Ambac said in a statement.
Ambac’s demise highlights the decline of bond insurance, a previously booming business that was among the hardest hit during the financial crisis. The industry has only one active player now, Assured Guaranty Ltd.
Ambac was one of the largest insurers of municipal bonds, but it expanded by selling guarantees on mortgage-backed securities and more complex mortgage-related vehicles known as collateralized debt obligations.
When house prices started slumping in 2007 and mortgage defaults picked up, Ambac was left with huge claims that it couldn’t afford to pay.
The most toxic part of the company’s business was seized by regulators earlier this year. This is being slowly shut down in a controversial process that leaves many policyholder claims only partially paid in cash. See the latest on Ambac’s regulatory rehabilitation.
When Ambac and its main bond insurance rival MBIA Inc. first hit trouble in 2007, investors worried that the demise of these companies might shake the foundations of the financial system.
That’s because they guaranteed hundreds of billions of dollars of muni bonds, while also serving as a valuable source of hedging for big investment banks playing in the market for mortgage-backed securities and CDOs.
When the banks realized bond insurers couldn’t afford to pay all their claims, they agreed to tear up the guarantees they’d purchased in return for cash payments worth cents on the dollar.
One of MBIA’s counterparties agreed to tear up guarantees on $4.4 billion of CDOs in return for a one-time payment of $72 million by MBIA.
ThIs has been a painful process that’s left the banks needing even more capital, exacerbating the financial crisis.
However, Ambac and MBIA’s troubles paled in comparison to those of American International Group, which had written similar guarantees on CDOs partly backed by mortgage-related securities.
When AIG couldn’t afford to pay out on those guarantees, it was saved from bankruptcy by the U.S. government, which committed more than $100 billion of taxpayer money.
MBIA has not filed for bankruptcy and it’s shares have more than tripled so far this year.
The bond insurer has challenged the underwriting of home loans backing some of the mortgage-related securities it guaranteed. The effort has already forced banks to buy back some home loans at 100 cents on the dollar.
These so-called put backs — and estimates of money from future put backs — have helped boost MBIA’s capital.
Meanwhile, MBIA has launched a new bond insurance business called National Public Finance Guarantee Corporation. If it can start selling new guarantees through this subsidiary, the company may have a future. However, the effort has been hampered by litigation.
National was downgraded by rating agencies in 2009 and in July this year Chief Executive Thomas McLoughlin resigned.
MBIA is scheduled to report quarterly results on Tuesday, after the market closes.