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Ambac, MBIA Likely To Face Liquidity Breakdown

As continuing losses at their bond insurance arms deplete capital and the plans to write new business is still on hold

Ambac Financial Group and MBIA are likely to face a liquidity crunch in the future, as continuing losses at their bond insurance arms deplete capital and the plans to write new business remain on hold – reported Reuters.

Bond insurers have been decimated by losses from selling hundreds of billions of dollars of protection on debt, that included large exposures to deals packed with risky mortgage-backed securities. The attempts to introduce new municipal bond insurance operations have also run into snags. Ambac in June, delayed plans to launch a new insurance arm after struggling to raise capital for the unit – Everspan.

MBIA plans to write new business through a unit called National Public Financial Guarantee Corporation, but is facing litigation from a group of banks that is delaying this effort. The banks allege the transfer of assets to the new company leaves fewer resources to pay claims in its bond insurance arm. Unless they are able to write new business, dividends to the holding companies will be restricted, and eventually will run through their available liquidity, quoted Reuters.

According to JPMorgan, MBIA also faces a potential cash crunch in 2011, though the company may face fewer restrictions in being able to upstream dividends to its parent unit.