Oakland, Calif says will sue muni bond insurers

By Jim Christie

SAN FRANCISCO (Reuters) - Oakland, California's city attorney said on Friday he will file a lawsuit claiming municipal bond insurers duped the city into buying bond insurance despite risks the guarantors faced to their triple-A ratings from insuring subprime mortgage-related securities.

Oakland will file its lawsuit against the insurers, including Ambac Financial Group Inc (ABK.N: Quote, Profile, Research, Stock Buzz) and MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) in August, Oakland City Attorney John Russo told Reuters in a telephone interview.

Ambac spokeswoman Vandana Sharma said the company does not comment of pending litigation. MBIA spokesman Kevin Brown said the company does not comment on matters involving litigation.

Russo said the lawsuit will be similar to one filed on Wednesday by the city of Los Angeles against several municipal bond insurers.

That lawsuit claimed the insurers reaped illegal profits in a conspiracy to prop up the market for municipal bond insurance while concealing risks to municipalities from the guarantors' exposure to subprime mortgage-related securities.

"These companies concealed their incredibly weak financial position," Russo said. "Insurance companies are supposed to be of a certain financial strength and in this case they're not."

Most bond insurers lost their top "AAA" ratings, which usually results in lower borrowing costs, as a result of exposure to risky subprime mortgage-related securities.

That left Oakland, its general obligation debt rated "A+" by Fitch Ratings, facing higher costs, Russo said.