Sunday, February 17, 2008

Ambac Considering a Split

by Bill McBride on 2/17/2008 08:42:00 PM

From the WSJ: Ambac in Talks to Split Itself Up (hat tip risk capital, sam)

Ambac Financial Group Inc. is in discussions to effectively split itself up ... A halving of Ambac would create one unit that insures municipal debt and one that would cover rapidly diminishing securities tied to the mortgages in a structure that effectively creates a so-called "good bank" and "bad bank."
Ambac is one of two bond insurers considering an effective break-up. FGIC Corp. on Friday notified Mr. Dinallo's office, the New York State Insurance Department, that it is pursuing an effective break-up. ... FGIC's plan came as a surprise to a consortium of banks ... and litigation may be one outcome. Ambac's plan is much further along and an announcement could be made this week.
It will be interesting to see how they unscramble the egg. I suppose the counterparties to the "bad bank" will receive equity in the "good bank".

From a finance perspective, it makes sense to split the companies. There is lost value in the "good bank" right now because they can't write new business. Splitting the company captures that lost value, and the only question is how that value - once captured - is split among the various parties. So I'd expect a split to happen, and happen soon.