Accounting standards are often arcane and boring; ask any CPA, and they'll likely tell you the same. But, at times, those same boring accounting standards can have a dramatic effect on a company's balance sheet and reported income. Witness bond insurer Ambac Financial Group Inc. (ABK), which posted $823.1 million in earnings for Q2, but only after recording a $5.1 billion paper gain as the value of key company liabilities tanked towards the end of June. The accounting standard in question here, SFAS 157, led the firm to record the gain as investors bid up risk premiums on Ambac's own debt over concerns about the company's solvency. Investors settled down in July, and CDS spreads tightened significantly. Which means the company has now given back $2.1 billion of its Q2 paper gain in just one month, according to a company press statement. The insurer also reported paid claims of $27.6 million during the month, balanced against more than $170 million received in cash received via maturing investments and coupon interest paid. Connie Lee approved Perhaps larger news came as Wisconsin regulators on Tuesday said they've approved a plan to move $850 million out of Ambac Assurance Corp., the company's current bond insurance subsidiary, into a new subsidiary known as Connie Lee. Ambac has been pushing for this sort of good insurer/bad insurer break up to hopefully protect future flows of income tied to the second-largest bond insurer's municipal line of business. Moody's Investors Service, as well as other major ratings agencies, have cut Ambac's core rating well below the AAA level on concerns over future business prospects. Connie Lee was set up by Congress in 1987 to insure university construction bonds; Ambac bought the company in 1997, and it hasn't written new policies since that time. "Connie Lee will help carry forward the successful franchise Ambac has built up over 37 years while addressing rating agency concerns regarding business production," Ambac CEO Michael Callen said in a statement. It might be more precise, however, to say that the Connie Lee franchise will clone Ambac. No details have emerged over the company's plans with the Connie Lee subsidiary, and whether or not the holding company intends to continue to support the "old" Ambac Assurance sub once the new subsidiary is operational; some of HW's sources have suggested that the Ambac Assurance may focus exclusively on managing runoff of the company's ill-fated foray into RMBS/CDO guarantees. For more information, visit http://www.ambac.com. Disclosure: The author held no positions in ABK when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.