Ambac rescue may be announced Mon or Tues--source

By Dan Wilchins

NEW YORK (Reuters) - A rescue for bond insurer Ambac Financial Group Inc (ABK.N: Quote, Profile, Research, Stock Buzz) may be announced on Monday or Tuesday, a person familiar with the matter said on Friday.

Ambac, facing billions of dollars of expected losses from guaranteeing repackaged subprime mortgages, is talking to banks and regulators about raising extra capital to keep its top credit ratings.

A deal has not yet been signed, and may still fall through, but talks with banks including Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz) and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) are advancing, although there are still details to be worked out, the person said.

Investors fear that Ambac will lose its top credit ratings from Moody's and Standard & Poor's, forcing investors to sell billions of dollars of securities and lifting borrowing costs for consumers and city governments. U.S. stocks, which had been in negative territory for most of the session, turned positive after the prospect of an Ambac rescue was initially reported by CNBC television.

Ambac shares rose 16 percent to close at $10.71 on the New York Stock Exchange, but the second-largest U.S. bond insurer's shares have fallen 88 percent since the start of 2007.

The U.S. bond insurance industry, which guarantees some $2.4 trillion of debt, is broadly looking to raise new capital and reorganize as expected losses have mounted. The insurers originally focused mainly on insuring bonds issued by state and local governments, but have lost big after the foray into guaranteeing repackaged consumer debt and other complicated instruments.

At least two bond insurers, MBIA Inc and FGIC Corp, have announced plans to divide their municipal bond insurance businesses from their other insurance operations. Ambac may follow a similar path, people familiar with the situation said.

The New York Times reported in Saturday editions that Ambac plans to split itself in two and hopes to raise $3 billion to bolster its finances, citing a person who had seen the plans and spoke on Friday. An announcement could come as early as Monday, the newspaper added.