Courts Side With Wisconsin Regulator in Ambac Effort

Wisconsin courts are not looking kindly on efforts to question the oversight of the state’s Office of the Commissioner of Insurance.

Late Wednesday afternoon, the Court of Appeals of Wisconsin rejected a motion seeking to stay the commissioner from allowing Ambac Assurance Corp., the junk-rated municipal bond insurer, to settle credit default swap claims owed to major banks, pending the outcome of an appeal of a lower court ruling.

The decision follows a ruling last week in which Dane County Circuit Court Judge William D. Johnston also sided with the commissioner’s office.

In the proposed agreement approved by commissioner Sean Dilweg, Ambac will pay the Bank Group — a series of 17 global financial institutions — $2.6 billion in cash and $2.0 billion in surplus notes to commute, or tear up, CDS contracts with a face value of $17 billion. The contracts’ current value is disputed.

The appeals court ruled on a motion to delay the settlement that was filed by a group of hedge funds that own $1 billion worth of residential mortgage-backed securities insured by Ambac. They sought an order to require that the CDS settlement not be finalized pending appeal.

The RMBS policyholders include Aurelius Capital Management LP, Fir Tree Inc., King Street Capital LP, King Street Capital Master Fund Ltd., ­Monarch Alternative Capital LP, and Stonehill Capital Management LLC.

Jenner & Block LLP, the law firm representing the group, said the $2.6 billion cash distribution comprises nearly 30% of the assets held in Ambac’s general account. Policies maturing in the future — including long-term municipal debt and the RMBS claims — would be “irreparably harmed” by the settlement, they argued, as it could be difficult to retrieve any money paid by Ambac to the banks.

Ambac “may, within a matter of hours or days, begin dissipating the only assets available to satisfy the RMBS policyholders’ claims,” Jenner & Block argued in its filing. “If [Ambac] is allowed to proceed, it will transfer $4.6 billion of those assets — perhaps irretrievably — to at least 17 different financial institutions around the globe, all but one of which are headquartered in foreign countries or are owned by a foreign parent.”

The CDS settlement was proposed in late March when Dilweg took Ambac’s most toxic holdings, valued at roughly $35 billion, and placed them into a segregated account to be administered by his office. The segregated account includes municipal debt issued by the Las Vegas Monorail Co. According to court documents, Ambac and the Bank Group are still “in the process of negotiating a final, binding agreement.”

In their appeal, Jenner & Block accused the court of being too reliant on the ­commissioner’s office, thereby reneging on its legal responsibility to review the commissioner’s decisions, and refusing to permit other parties to develop factual support for their responses.

“The Circuit Court heard no testimony, and admitted no evidence, during the proceedings,” the appeal said. “The Circuit Court simply adopted OCI’s findings of fact and conclusions of law.”

Jenner & Block also argued that CDS contracts, under Wisconsin state law, are subordinate to other policyholders’ claims and should not be given prefer­ential treatment.

In denying the motion to intervene, the appeals court ruled it was not convinced the RMBS holders, or the public interest, will be harmed by the settlement. The court called such claims “speculative” and said the funds at issue were “clearly collectible.”

In addition, the court said: “It is not clear whether we have jurisdiction to enjoin the settlement agreement,” nor is it clear that the RMBS holders “have standing to challenge the settlement agreement.”

The court was, however, persuaded by the commissioner’s office, represented by Foley & Lardner LLP, which claimed that any disruption to the CDS settlement could cause members of the Bank Group to drop out of the agreement.

Settling the claims now, before their value could rise, was a key part of Johnston’s ruling last week. He said his decision would eliminate “the possibility of costly, slow-moving mark-to-market litigation” and “impair Ambac’s ability to provide continuing coverage to policyholders in the general account.”

The RMBS policyholders have until June 11 to respond.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER