Ackman proposes one way to split up bond insurers

 
Bill Ackman, head of hedge fund firm Pershing Square Capital Management LP, has proposed a way to split up struggling bond insurers that he said would protect municipal bond policyholders and could help pay claims on more troubled structured finance guarantees.

Ackman, who has been betting against shares of leading bond insurers Ambac Financial, sent the proposal to the New York State Insurance Department late Tuesday.

Though,MBIA spurned the idea, arguing it is mainly designed to boost Ackman's negative bets against MBIA and Ambac.

The plan reportedly got a lukewarm reception from the regulator. Rating agencies Moody's Investors Service and Fitch Ratings didn't respond to requests for comments on Wednesday. Standard & Poor's declined to comment.

Bond insurers agree to pay interest and principal on debt in a timely manner in the event of default. The $2.4 trillion business relies on AAA ratings to win new business. Those top ratings are in jeopardy now because of concerns insurers like Ambac and MBIA will have to pay big claims from guarantees they sold on complex mortgage-related securities known as collateralized debt obligations (CDOs).

f the situation gets bad enough, regulators including Dinallo are considering splitting bond insurers in two. That would separate their steady muni bond businesses from the more troubled structured finance units, which are being pummeled by CDO exposures.
Indeed, FGIC, a big rival of Ambac and MBIA, submitted a plan with some of those attributes last week.

However, splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies.