Ambac Assurance Corp, a unit of Ambac Financial Group Inc. (ABK) has sued Credit Suisse Group (CS), alleging the company misrepresented the risks of mortgage-backed securities in a deal Ambac insured in 2007. Ambac claimed that many of the loans involved were fraudulent, based on misstatements of income or occupancy.

Ambac increased its estimate of remediation recoveries on residential mortgage backed securities (RMBS) transactions due to breaches of representations and warranties by approximately $738 million during the third quarter. Ambac is actively working on these transactions to resolve these breaches through litigation or otherwise, and continues to believe that the assumed recovery time of three years to be appropriate.

At the height of housing boom, dishonesty was widely prevalent in the industry, with very clear protective language was standard in the loan contracts involved. Many loans by financial institutions were made with false representations. However, a problem with tracking the main culprit is that many of them have been acquired by others who seem less than enthusiastic about accepting responsibility for misrepresentations and breach of warranty.

As a result of significant losses on exposures to RMBS Incorporatedluding financial guarantee insurance policies and credit default swap contracts on credit default obligations of asset backed securities, Ambac Assurance’s statutory capital and surplus had been reduced significantly. Ambac Assurance continues to work to reduce exposures through commutations and other settlements, a process referred to as remediation.

Bond insurers including MBIA Inc. (MBI) with no new business are regarding remediation as an important consideration in reducing losses. Ambac last year said that if it was unable to meet enough cash it may file for bankruptcy. Cases like this, if they turn out in Ambac’s favor, would garner cash and reduce its future liabilities.  However, this process involves considerable litigation and delay.

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