A lawsuit filed by New Orleans alleging that "mismanagement" and "greed" at Ambac Assurance Corp. cost the city millions of dollars is nothing more than "a lot of sound and fury," the insurer said in a motion seeking dismissal of the case earlier this week.
The city said Ambac's exposure to structured finance products weakened the insurer's status as a credit enhancer, leading to failed remarketings of $171 million of taxable pension revenue bonds. In the July complaint, the city said increased interest costs due to the remarketing failure have cost the city $400,000 extra per month and more than $2 million in total. New Orleans paid about $6.4 million for the policy in December 2000.
But Ambac's response states its sole duty as an insurer is to pay the principal and interest payments on the variable-rate demand bonds if the city defaulted. The policy - and all others it wrote - made no promises Ambac would avoid backing structured finance products or maintain its credit rating, the insurer stated in the motion filed Sept. 30 in federal court in the Eastern District of Louisiana.
New Orleans officials did not return calls yesterday seeking comment on Ambac's motion.
The motion said that New Orleans knew it took on added risks when it issued variable instead of fixed-rate debt. The decision "backfired" and the city now wants someone else to bear the costs, Ambac said.
"Due to the unforeseen and unprecedented credit crisis of 2007 and 2008, the city finds itself making higher interest rate payments on its bonds than it wishes to pay," the lawsuit states. "The city is looking for someone to blame. Without basis, the city has directed its anger at Ambac."
The city has also sued UBS Securities LLC for failing to make the appropriate efforts to remarket the bonds.
Judge Peter Beer has scheduled a Nov. 12 hearing on Ambac's motion to dismiss.
Other cities in Louisiana and the state itself may also sue Ambac and other insurers, state officials said last month. State Treasurer John Kennedy asked at least one issuer - the city of Shreveport - why it didn't plan on suing CIFG Assurance NA at a State Bond Commission meeting last month.
In addition, a number of cities in California, including Los Angeles and Oakland, have filed lawsuits against bond insurers alleging they sold "worthless" policies. The issuers would not have purchased insurance from the companies had they known the extent of the exposure to subprime housing loans, the complaints state.