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This is something that we were talking about last November:

Bond insurer Ambac Financial (ABK) has warned bankruptcy is a distinct possibility, sending its shares plummeting more than 30% today.

What is intriguing about this pending bankruptcy is how this company escaped bankruptcy in 2008, was downgraded continually in 2009, yet just reported billions in profit 5 days ago. Now it warns of bankruptcy?

This story also is related to municipal bonds.

Rewind to July of last year and Ambac was headed to zero fast after having been downgraded by S&P the month before. Basically, their business model of using a AAA rating to guarantee bonds (a sort of credit default insurance) was rendered non-viable by the credit crunch.

Yet, here we are a year later and the bond insurer has only now just filed for bankruptcy.

Ambac Financial Group Inc., a holding company for the bond insurer being restructured by state regulators in Wisconsin, filed for bankruptcy protection to reschedule payments on more than $1 billion in bonds and other claims.

The petition for Chapter 11 protection filed in Manhattan today listed assets of $394.5 million and liabilities of $1.68 billion. The Vanguard Group Inc. was listed as the largest shareholder, with 5.46 percent of the company’s stock.

The case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

You could see this filing finally coming because last week S&P downgraded the company to ‘D’, i.e. default status because it had skipped an interest payment on its senior debt. What this means for bond insurance is unknown. At a minimum, MBIA (NYSE:MBI), the other major bond insurer, will be closely watched.

Update: Here is the bankruptcy filing (via DealBook):Ambac’s Bankruptcy Filing

See also "And then there was one" from this weekend’s Economist. It’ll fill in the relevant details.

Source: Press release – Ambac Files for Bankruptcy under Chapter 11 of the United States Bankruptcy Code, Market Watch

Source: You Could See This Coming: Ambac Files for Bankruptcy