But never has this been clearer than in the aftermath of the financial crisis. Small banks that took no part in reckless lending are saddled with higher costs because of the bailout used to rescue big banks that messed up; individuals who scrimped and saved during the boom are being hurt by interest rates kept artificially low to rescue the economy. Yet another situation involving haves and have-nots is evident in the workout plan covering policyholders of the Ambac Assurance Corporation, the Ambac Financial Group subsidiary that insured municipal and structured finance obligations. Ambac Financial, which has been struggling since the crisis began, filed for bankruptcy protection last Monday after skipping an interest payment on a debt issue. Financial filings from Sept. 30 showed that Ambac had about $912 million in capital and about $7.9 billion in resources to pay claims. Ambac’s insurance subsidiary is domiciled in Wisconsin, and Sean Dilweg, the state’s insurance commissioner, is overseeing the rehabilitation. He has submitted a plan for the company, which the Dane County Circuit Court must approve. A week of hearings on its pros and cons is scheduled to begin there on Monday. Any plan to rehabilitate Ambac is bound to be complex, given the array of deals the company did in its high-cotton days. The company not only insured municipal debt and mortgage-backed securities, but it also wrote credit default swaps on collateralized debt obligations — the same financial nitroglycerine that toppled the American International Group. Mr. Dilweg says his plan treats all 15,000 Ambac policyholders fairly. In an interview last Friday, he conceded that his proposal is unique, saying, “We have longstanding statutory tools that I am using to fully protect the policyholders.” Ambac declined to comment. THE commissioner’s plan would separate the insurer into two entities. One, known as the “segregated account,” contains $50 billion in policies written on mortgage securities and a small group of other unrelated issues, like debt raised to build a monorail in Las Vegas. There are roughly $30 billion of mortgage securities in this account. Anyone who holds policies on mortgage debt would receive 25 cents on the dollar in cash on the claims and a note for the rest — payable in 2020. The notes carry an interest rate of 5.1 percent. The rest of the company, if the plan goes through, will contain all the other Ambac policies, predominantly those insuring municipal debt. Any parties that hold the $300 billion worth of policies in this segment will receive full value. But a group of investors holding $23 billion of Ambac-insured mortgage securities are attacking the good-bank/bad-bank proposal in court. They argue that the plan is treating them unfairly by giving them just a fraction of the face value of their policies, even though the municipal debt policies would be paid in full. This second-class treatment isn’t the only element of Mr. Dilweg’s plan that has upset the mortgage investors. They are also disturbed by the fact that in June the commissioner quietly allowed Ambac to unwind $13 billion in credit default swaps it had written for 14 financial institutions, most of them from overseas. Ambac paid $4.6 billion in cash and notes under this deal, depleting funds available to pay Ambac policyholders. The money went out the door even though swaps aren’t typically given the same kind of seniority in a bankruptcy as traditional insurance. In a bankruptcy filing, the holders of such swaps are generally considered unsecured creditors and have to be paid after holders of old-fashioned insurance. Finally, the mortgage investors are astounded that Mr. Dilweg’s plan keeps Ambac’s executives, some of the same managers who wrecked the company, in place. Moreover, the plan protects these managers from lawsuits except for intentional fraud and willful misconduct. Participation in the plan bars investors from suing Ambac management for gross negligence, for example. “A fundamental precept of rehabilitation is to eliminate the management that caused it — that management must bear some responsibility for Ambac’s financial collapse,” lawyers for the investors said in a filing. (Page 2 of 2) The company doesn’t seem to agree. Late Friday, Ambac disclosed that it awarded its longtime general counsel a special bonus of $100,000 “in recognition of his efforts to maximize the company’s cash position.” While all this might seem like just another food fight among financial titans, we beleaguered taxpayers have an interest in the outcome. That’s because Fannie Mae and Freddie Mac are among those objecting to the plan; the mortgage finance twins own $3.25 billion in Ambac-insured securities that Mr. Dilweg’s plan would disadvantage. Mr. Dilweg, who was appointed by the court as the overseer of the Ambac case, said that segregating the loss-ridden mortgage securities from other healthier deals insured by Ambac is the best approach for all its policyholders and for the public. As for keeping management in place, Mr. Dilweg said that four new independent directors would help provide oversight at the insurance company. “I recognize the conflict but we have a vendor relationship” with the company, Mr. Dilweg said. “If they are not performing I can sever the relationships with all 300 employees.” He argued that the $4.6 billion deal with the foreign banks to unwind the credit default swaps benefited all of Ambac’s policyholders. He said he considered the holders of those swaps to be policyholders. “This is very different from the accepted practice in a federal bankruptcy proceeding,” said David M. Greenwald, a lawyer at Jenner & Block, which represents a group of mortgage security policyholders. “There, the court must hold a fairness hearing in which each side has to explain why the proposed settlement is fair to other creditors, and does not reward junior creditors in an early settlement at the expense of senior creditors — in this case policyholders who by statute must be made whole first.” In addition to the problematic swaps payout, other aspects of the proposal seem unfair to mortgage securities policyholders. While the plan is under consideration, Ambac has not been paying claims on mortgage securities that have experienced losses. But those investors continue to pay premiums into the general company account, which pays out 100 percent on municipal bond insurance claims — but not on their mortgage debt insurance. Then there’s the fact that the general account — not the mortgage securities account — will receive any money Ambac recovers in its efforts to force mortgage originators to buy back improper loans insured by the company. It seems bizarre that those recoveries won’t be channeled to the mortgage securities policyholders. PATRICK J. TROSTLE, a lawyer at Jenner & Block, maintains that Mr. Dilweg’s plan would trample on the contractual rights of many Ambac policyholders. “Those policyholders would be required to wait years and years for payment of their claims with no certainty that full payment will ever come,” he said. “Meanwhile, the regulator is assisting the wrongful transfer of billions of dollars of assets to the parent shareholder and fighting to preserve a role for Ambac’s management, which brought Ambac to its present plight.” Not that we needed another example, but you can add Ambac’s regulator-approved rehabilitation plan to the long list of cases where accountability for the financial mess is AWOL. http://www.nytimes.com/2010/11/14/business/...ewanted=2&src=busln |
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