Ambac Financial Group, the bankrupt holding company for bond insurer Ambac Assurance Corp., filed a plan of reorganization in bankruptcy court this week, but quickly came under criticism from the Wisconsin regulator in charge of overseeing Ambac Assurance.

Ambac Financial, which voluntarily filed for Chapter 11 last November, has struggled to devise a plan that both Ambac Financial and the Wisconsin Office of the Commissioner of Insurance (OCI) can agree on.

In a statement, Wisconsin rehabilitator Theodore Nickel, who oversees the segregated account of Ambac Assurance, said he "does not believe that the reorganization plan proposed by Ambac Financial is in the best interests of policyholders of the segregated account, or for that
matter, those of the Ambac Financial creditors."

The OCI rehabilitator added that he engaged in discussions for several months with Ambac Financial and its bankruptcy creditors committee to see if mutually agreeable terms could be arrived at, but it seems no such agreement has been met.

"Despite the rehabilitator's best efforts to facilitate a fair resolution of issues, the parties reached an impasse," he wrote, adding that Ambac Financial filed a proposed plan to restructure debt "on terms which are inconsistent with the consensual direction of the recent negotiations with the rehabilitator."

The statement said the plan would "employ litigation to try to divert value from the segregated account. The rehabilitator will vigorously contest that litigation."

The Wisconsin regulator has been active in efforts to reach an agreement between Ambac Financial and Ambac Assurance since they became involved in their dispute. The regulator also oversees the segregated account, which was established in March 2010, to separate certain liabilities
that presented serious financial hazards to the company and its policyholders. It holds about $50 billion in policies.

Last May, the Wisconsin regulator proposed a plan that Ambac Financial found unacceptable, and Ambac responded by saying it would submit its own plan by the July deadline "with or without the agreement of the OCI."

At that time, lawyers for Ambac Financial said that bankruptcy plan was "very disappointing and the credits committee found it disappointing too."

Lawyers representing Ambac Financial at Dewey & LeBoeuf then said if a deal with the insurance office was not included in the new plan, they may have to resort to litigation. The lawyers did not return calls seeking comment on the new plan of reorganization.

The Wisconsin regulator also recently appointed Roger Peterson as a special deputy commissioner for the company's segregated account, effective July 1. Peterson reports to Nickel. He now focuses solely on his new role, having resigned as deputy administrator of the OCI's division of regulation and enforcement.

Peterson is responsible for oversight and strategic management of the segregated account, including developing its business plans, goals and priorities. He also will manage its loss-mitigation efforts, litigation strategies, and surplus note issuance and payments.

When Peterson was hired, Ambac said he "will act for the benefit of policyholders and will not take into account the interests of security holders of Ambac Financial Group, or holders of preferred shares of Ambac Assurance."

Ambac Assurance ran into serious trouble in late 2007 because of decaying credit quality in its structured finance policies, which included contracts guaranteeing to cover losses on mortgage bonds and credit default swaps.

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