by PJ on 9/02/2008 08:34:00 PM

Looks like the good insurer/bad insurer model is pushing ahead, per Bloomberg:

Ambac Financial Group Inc., the world's second-biggest bond insurer, received approval from Wisconsin regulators to begin offering municipal bond insurance through a newly created insurer called Connie Lee.

Ambac rose as much as 15 percent in late trading as Wisconsin regulators, which have jurisdiction over the New York- based company, approved a plan to move $850 million out of Ambac Assurance Corp. into the new business, according to a statement today. Ambac is seeking to obtain an AAA credit rating from Moody's Investors Service and Standard & Poor's for Connie Lee.

Essentially, as I understand it, Ambac will move all of its municipal business and employees to Connie Lee, and create Ambac v2.0. The toxic RMBS/CDO stuff will stay back with Ambac; what isn't being discussed by the company (or by regulators) is whether it intends to force counterparties into commutation of its CDS contracts on RMBS/CDO issues once the cloning process is complete.

The gutted Ambac will be in an interesting position should this go through; will it be well capitalized enough to pay on its claims? Will it focus on putting contracts back for fraud and misrepresentation? Or will it simply tell policyholders they'll get a reduced commutation or get nothing on the guarantee? That'd be a cram-down of an entirely different sort.