Ambac Financial Group(ABK), even as it teetered on the brink of bankruptcy, invested in at least $2.5 billion of residential mortgage-backed securities, piling on risk during the worst credit bubble in U.S. history.

Making matters worse, Ambac insured a third of that amount. The full sum is now insured in a segregated account seized by Wisconsin's insurance regulator, or OCI, whose goal is to keep the company from falling into bankruptcy. The OCI is responsible for making good on Ambac's investments if the bonds fail to perform. ...

Amabc, which along with MBIA(MBI) are among the biggest bond insurers in America, spent $329 million on the debt it insured, now recorded at $332 million as an asset on its books. According to Ambac spokesman Peter Poillon, it was sort of a so-called deep-value play that could pay off with outsized returns. Investors viewed the bonds dimly, though Ambac thought it had an advantage, as it knew the performance of the underlying accounts. Ambac got the securities at a 44% discount.

Poillon said Ambac wasn't in double jeopardy because, if the company had to pay out on a default, it would be paying itself. Still, the value of the bond would deteriorate, potentially producing a loss for Ambac.