Mr Ackman, whose Pershing Square Capital Management has been betting for years that shares of the bond insurers will weaken, said in a letter to regulators that Ambac Financial Group Inc faces losses of US$11.61 billion from asset-backed securities and collateralised debt obligations it insured.

Rival bond insurer MBIA Inc faces at least US$11.63 billion of losses from these obligations, plus additional losses from reinsurance that may no longer be valid, he said.

To preserve capital, Mr Ackman said Ambac and MBIA should be forced to stop shifting money from their operating subsidiaries to their holding companies.

Money moved to the holding companies can be used to pay dividends, and pay holding company debts and expenses, but money kept at the operating subsidiaries can be used to pay claims. State insurance regulators typically look to make sure insurers can pay off their claims.

Pershing Square's short bet against the bond insurers has paid off handsomely in recent months.

Ambac's shares, which fell 17 per cent to close at US$10.73 on the New York Stock Exchange on Wednesday, have shed 88 per cent of their value since the beginning of 2007. MBIA's shares, down 12.6 per cent to US$13.96, have fallen 80 per cent over the same period.

The losses Ackman is projecting are significantly larger than what the bond insurers themselves have projected.

Losing over US$23 billion combined would be a real blow to Ambac and MBIA, which insure a total of more than US$1.2 trillion of debt.

Ambac last week recorded US$5.2 billion of write-downs for credit derivative positions, pre-tax.

MBIA said in a supplement on Jan 9 that it expects some US$4 billion of charges for 2007 linked to changes in the market value of some securities and boosting of reserves, but that its capital after a recent spate of fundraising was sufficient to maintain top ratings.

The main units of Ambac, MBIA and other bond insurers are struggling to keep their top-triple A credit ratings.

Fitch downgraded Ambac's top rating on Jan 18. The ratings agency also downgraded smaller bond insurer FGIC on Wednesday.

If Moody's Investors Service or Standard & Poor's cut the top ratings for Ambac and MBIA, investors that can only hold AAA-rated securities could be forced to sell billions of dollars of bonds, sending borrowing costs for city governments, consumers, and others soaring.

Fears weigh
Fears of broader market problems from potential bond insurer downgrades have triggered stock market declines and corporate bond market weakness since at least the beginning of last week.

In an open letter to Ambac and MBIA's state regulators, as well as officials at the US Securities and Exchange Commission, Mr Ackman said that it has completed a complete analysis of securities in Ambac's and MBIA's portfolio, based on data from a bank that it believes are reasonable.

But Pershing makes no representations regarding the accuracy and completeness of the data, Mr Ackman wrote.

Mr Ackman said the data and the valuation models that Pershing used were posted publicly at: http: www.yousendit.com/transfer.php?action=batchtdownload&batchtid=Mmd0UXVuQzMzeUxIRGc9PQ

Pershing Square welcomes suggestions from market participants for improving its model, Mr Ackman said. The letter refers to the model as the 'Open Source Model,' implying that Ackman expects other market participants at multiple firms to work collaboratively to improve the model, the way programmers work on open-source software. -- REUTERS

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