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March 26, 2010 4:56 PM

The Ambac Bonanza

Posted by Zach Lowe

Ambac Financial Group appears on the verge of bankruptcy--or at least a massive out-of-court restructuring--after Wisconsin's insurance regulator essentially seized control of $64 billion in toxic assets and liabilities created by Ambac's insurance unit and forced a piece of the company into court, according to Reuters and The Wall Street Journal

The firm that will handle any bankruptcy filing: Dewey & LeBoeuf, which has a half-dozen partners advising Ambac on its options, according to sources familiar with the deal. And those options are extraordinarily complicated given the intersection of insurance rules, state regulatory authorities and a possible bankruptcy filing. Foley & Lardner is advising the Wisconsin Office of the Commissioner of Insurance, the regulator that seized a portion of Ambac's worst assets and liabilities--mostly tied to credit-defaults swaps and guarantees Ambac issued on mortgage-backed securities--and segregated some of those assets and liabilities into a separate unit, according to the Journal and Reuters. Kevin Fitzgerald, chair of Foley's insurance team, says Wisconsin regulators retained Foley to help supervise Ambac a full two years ago, when it was clear the broader economic problems could infect Ambac. Fitzgerald says he usually represents insurance companies on the other side of the table from Wisconsin regulators. "This has been a different experience for me," he says.

State regulators took the separate Ambac unit composed of the company's bad assets and liabilities and placed it in state rehabilitation court. In simple terms, that court works like a federal bankruptcy court for insurance companies, which don't have the option of filing for Chapter 11, Fitzgerald says. Creditors, including those to whom Ambac owes insurance payments on mortgage-backed securities, will be able to negotiate repayment plans with Ambac through the state court system, Fitzgerald says. Counterparties on credit-default swaps will negotiate payment terms with the larger company that is not involved in the Wisconsin court proceedings, Fitzgerald and other lawyers say.

Among the other firms involved: Bingham McCutchen is representing a dozen mutual funds that hold municipal bonds insured by Ambac. The funds are worried that the complicated restructuring process will offer different recovery rates for different types of creditors, says Harold Horwich, the lead Bingham partner on the matter. "This is somewhat more complicated than your garden variety Chapter 11," Horwich says. "We are dealing with less-charted territory."

Dealing with the same territory: Davis Polk & Wardwell, which is serving as counsel to a group of unnamed megabanks on the other side from Ambac in various transactions. Donald Bernstein, the lead Davis Polk partner on the matter, was traveling and unavailable for comment. 

The lead Dewey partners on the matter, including restructuring partners Barbara Goodstein and Peter Ivanick, declined to comment through a firm spokesman. 

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