Ambac CEO fires back over Puerto Rico strain

The CEO of one of Puerto Rico's largest insurers spoke out in an exclusive interview with CNBC, firing back at his critics, talking about the decision to sue Puerto Rico after its recent debt default, and warning of the "dreadful" impact granting the commonwealth access to U.S. bankruptcy laws could have on its citizens and the broader markets.

Puerto Rico's senior officials have been desperately asking U.S. lawmakers to grant the island access to Chapter 9 bankruptcy protection in order to restructure its some $70 billion in outstanding debt — a move that Ambac CEO Nader Tavakoli maintains is misguided.

Alejandro García Padilla, the governor of the commonwealth, as well as Puerto Rico's bankruptcy professionals and public relations experts are placing all their bets on getting Chapter 9 access, Tavakoli said.

"They are spending a lot of time and effort and money including a big [public relations] machine endeavoring to do that," he said.

Calling that path "dreadful" and "a horrible idea for the people of Puerto Rico," Tavakoli says a Chapter 9 filing would lead to lengthy litigation and hundreds of millions of dollars in incremental expenses. He maintains that it would also put the island's integrity and ability to access capital markets in the future on the line.

"We think it will be very hard for the commonwealth to regain credibility because what they are talking about is applying bankruptcy retroactively to obligations issued with a clear understanding that there would not be a bankruptcy," he said.

Tavakoli would instead favor the implementation of a federal control board to oversee the commonwealth, similar to what was put in place 20 years ago for Washington, D.C.

"We'd be willing to work constructively in that process and we would be willing to think about alternatives to lawsuits," he said.

Last week, Ambac jointly filed suit with Assured Guaranty against numerous senior officials of the commonwealth.

"Lawsuits should be a last resort and we really did this reluctantly," he said. But Ambac was "in a situation where we feel that the commonwealth has blatantly violated their own laws, as well as the Constitution of the United States."

The suit, which was filed on Jan. 8 in the U.S. District Court of Puerto Rico in San Juan, challenges Puerto Rico's use of an emergency measure, which was authorized by the governor, to "claw back" revenue pledged to certain tax-supported bonds in order to make most of the nearly $1 billion in debt payments due to bondholders on Jan. 4.

The insurers contend that the diversion of pledged funds resulted in a default of about $36 million due on bonds issued by Puerto Rico's infrastructure authority, which forced the companies to pay out about $10.75 million under insurance policies that backed a portion of the defaulted bonds.

Puerto Rico has 21 days from the moment it is served with the summons and a copy of the complaint to respond to Ambac and Assured Guaranty's lawsuit, says John Mudd, a San Juan-based attorney who specializes in bankruptcy and constitutional law.

Reuters recently reported that three of Ambac's top 10 shareholders called for Tavakoli to step down from his CEO position. Calling the disgruntled shareholders a "couple of aggressive hedge funds" that also own Ambac shares, he noted, "We're not aware of any shareholders calling for my ouster."