Bond insurer splits may lead to lawsuits

NEW YORK (Reuters) - The proposal to break-up the businesses of bond insurers into two separate segments, with one covering "good" municipal debt and the other covering "bad" structured finance debt, may lead to years of litigation, said Bank of America analysts, in a note to clients, late last week.

Bond insurers are expected to make billions of dollars of payouts in the coming years, after having insured bonds linked to subprime mortgage bonds and other risky debt.

U.S. bond insurers, which guarantee more than $2.4 trillion of debt, have been hit hard by the sub-prime lending crisis and are struggling to keep the top ratings that are crucial for them to win new business.

Last week, FGIC Corp, a bond insurer that has lost its top credit ratings, told New York regulators that its wants to split into two companies.

Earlier Monday, the Wall Street Journal Web site reported that Ambac Financial Group Inc (ABK.N) is in discussions to split itself up in a move aimed at ensuring that municipal bonds backed by the company retain high credit ratings.

"Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the claims-paying resources of the entire entity," noted Bank of America analyst Jeffrey Rosenberg.

"The fact that one group of policy holders' exposures has imperiled the policies of the other does not mean they should forfeit the value of their claims altogether," he added.

Hence, Rosenberg states that the "good bank, bad bank" proposal, is likely to lead to years of litigation.

(Reporting by Euan Rocha and Dan Wilchins; Editing by Marguerita Choy)