Financially troubled Ambac Assurance Corp., the principal operating subsidiary of New York-based financial guaranty firm Ambac Financial Group (ABK), said today it established a segregated account to hold insurance policies related to residential mortgage-backed securities (RMBS) and other structured finance transactions for orderly runoff and settlement. While Ambac said the segregated account rehabilitation does not constitute an event of default under its bond indenture, the firm may consider bankruptcy to restructure its debt. The news comes as no shock, after Ambac warned in a regulatory filing last year that it may need to file for bankruptcy protection. The bond insurer’s actions stemmed from the direction of the Wisconsin Office of the Commissioner of Insurance (OCI), which said immediate action is necessary to address Ambac’s financial position. "I am taking action to protect policyholders, including investors in thousands of state and local municipal bond issues and other public finance securities, who rely on [Ambac]'s guaranty," said Wisconsin Insurance Commissioner Sean Dilweg in a press release today. "I have a concrete plan for rehabilitation, and details will be reviewed in court over the coming weeks." The segregated account will contain certain policies insuring or relating to credit default swaps, all of Ambac’s RMBS obligations, certain other student loan policies, policies insuring troubled credits and other contingent liabilities including reinsurance policies. The segregated account is supported by a $2bn secured note. “The Board has worked diligently over the past two years to forge the best possible outcome for Ambac and its various stakeholders,” said chairman of the board of directors Michael Callen, in a press statement today. “In light of OCI’s determination to take some sort of rehabilitative action with respect to Ambac Assurance, the Board has determined, after thoughtful and careful consideration, that compliance with the direction of OCI to establish the segregated account of Ambac Assurance and to consent to the terms of the proposed settlement agreement of our CDO of ABS portfolio is the best alternative available.” Additionally, Ambac agreed on a proposed settlement agreement with several counterparties to commute “substantially all” its remaining collateralized debt obligations of asset-backed securtities (CDOs of ABS). Callen added: “The actions taken today, together with the proposed settlement if effected, commute substantially all of our CDO of ABS exposure at a substantial discount to the expected present value of potential claims.” Under the agreement, Ambac will pay an aggregate $2.6bn in cash and $2bn of newly issued surplus notes of Ambac. Write to Diana Golobay. Disclosure: The author holds no relevant investment positions.