Banks join to rescue Ambac: sources

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.

Morgan Stanley analysts said in a report on Friday that either MBIA or Ambac will likely be downgraded by more than one rating agency, probably within a month.

GREENHILL

The banks retained Greenhill & Co, a boutique investment bank, as an adviser, CNBC said, citing an unnamed source.

Representatives of Barclays, Citigroup, RBS and UBS declined to comment.

Christy Phillips-Brown, a spokeswoman at Wachovia, said, "We would be supportive of efforts to add stability to the system," adding that Wachovia's exposure to bond insurers is "relatively insignificant."

The other banks and Greenhill did not immediately respond to requests for comment.

Regulators including New York Insurance Commissioner Eric Dinallo have been meeting with industry participants to discuss a rescue.

Dinallo said in a statement on Friday that there had been "a number of developments" in his talks regarding bond insurers. Dinallo's office said on Monday that it had hired Perella Weinberg Partners to advise on bond insurers.

STRAYING OFF THE PATCH

Bond insurers lost big after venturing beyond the staid world of guarantees on bonds issued by cities and states and into the higher-profit world of guaranteeing bonds backed by consumer debt like subprime mortgages.

That decision backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities sank.

Many believe traditional municipal bond insurance can still be a good business. Warren Buffett's Berkshire Hathaway (BRKa.N) (BRKb.N) in late December created a bond insurer to take advantage of opportunities in the market.

On Thursday, MBIA reported a record $2.3 billion quarterly loss and said it would look for new capital. But it said it expected to retain its triple-A rating. S&P nevertheless put that rating on review for downgrade, joining Moody's.

(Additional reporting by Dena Aubin, Christian Plumb, Neil Shah, Jonathan Stempel; Editing by Dave Zimmerman, John Wallace, Gary Hill)