Banks join to rescue Ambac: sources

By Dan Wilchins

NEW YORK (Reuters) - A group of large banks has joined together to find ways to shore up Ambac Financial Group Inc (ABK.N), a large bond insurer battered by the global credit crunch, two people briefed on the talks said on Friday.

Another group is looking at ways to rescue other bond insurers, one of the people said.

The stakes are high for banks, insurers and the broader economy. Bond insurers, which guarantee more than $2.4 trillion of debt, are expected to suffer billions of dollars of losses after insuring repackaged subprime mortgages. They are looking to raise capital to protect their credit ratings.

Any downgrades of insurers could force investors to sell billions of dollars of bonds, lifting borrowing costs for consumers, governments and others, and resulting in big losses at major banks.

Some of those same banks may reinsure some of Ambac's exposure, one of the people said. The group looking at Ambac has no definite time horizon for crafting a plan, the people said.

Any capital that banks use for bond insurers will strain their already creaking balance sheets. The banking industry has suffered more than $130 billion of write-downs in the last year related to repackaged mortgages and other debt, and more write-downs are expected in the coming months.

CNBC said the eight banks working with Ambac are Barclays Plc (BARC.L), BNP Paribas (BNPP.PA), Citigroup Inc (C.N), Allianz's (ALVG.DE) Dresdner Bank, Royal Bank of Scotland Group Plc (RBS.L), Societe Generale (SOGN.PA), UBS AG (UBSN.VX) and Wachovia Corp WB.N.

Ambac guarantees about $524 billion of bonds, while rival bond insurer MBIA Inc (MBI.N) guarantees $679 billion.

On the New York Stock Exchange, Ambac rose $1.48, or 12.6 percent to close at $13.20, while shares of MBIA rose 86 cents, or 5.6 percent, to $16.36. Since the beginning of 2007, shares of Ambac have fallen 85 percent, while shares of MBIA have fallen nearly 80 percent.

In further evidence of investor hopes that the talks may prove fruitful, the cost of protecting Ambac obligations against default in the credit derivatives market dropped.

TIME IS RUNNING OUT

Insurers need to raise capital to keep their ratings, but raising capital is difficult now. Ambac last month cancelled plans to issue equity or convertibles in part because of market conditions.

Credit rating agencies have already taken away triple-A ratings from at least three bond insurers. Fitch last month cut the top rating on Ambac's main unit, while Standard & Poor's on Thursday cut FGIC Corp's main unit.

Moody's Investors Service said late Thursday that some bond insurers will not likely be able to boost their financial strength to levels required for a top rating, in part because the insurers are having trouble raising capital.

The rating agency also said on Thursday it may cut the top rating for MBIA's main insurance unit.