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Investors Wait on Word of Ambac Rescue

A consortium of banks is working with the bond insurer on a plan that could come as soon as Monday.

Ambac Financial


shares were edging higher early Monday, as investors await word of a reportedly imminent bailout deal from a consortium of banks.

Big money-center banks that have the greatest exposure to Ambac are said to be ponying up between $2 billion to $3 billion in a plan that would see it break itself into two halves, sources tell

. One would house policies for conservative debt including municipal bonds, and another would backstop losses on structured debt, which is dropping in value due to the slumping mortgage market.

In a note Monday, Banc of America Securities analyst Tamara Kravec said that still might not be enough to stave off ratings downgrades, according to the

Associated Press

. A hit to the bond insurer's largely pristine rating -- already downgraded to double-A by Fitch Ratings -- could debilitate Ambac's ability to win new business.

"In our view, there is still a meaningful risk of downgrades for Ambac," Kravec wrote in the note. "Moreover, the question would remain: is $3 billion enough?"

Late Friday,


first reported that a bank consortium that has been hashing over a bailout of Ambac over the past several weeks had begun to make "significant progress" that could see a plan come to fruition by as early as Monday. The television report sent stocks soaring to the close.

Such an Ambac breakup would likely bolster the staid muni bond exposures and help it retain its triple-A rating, while providing a backstop in the form of the capital infusion from the money-center banks that include


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Wachovia Bank

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Barclays Capital

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Royal Bank of Scotland


BNP Paribas


Société Générale


A call to an Ambac spokeswoman in New York was not returned. Officials at the banks either declined to comment or did not return calls.

Ambac shares recently were up 2% to $10.92.

Specifics on the plan could not be learned. But one source tells

that discussions between the banks and the guarantor have been centered on trying to arrange a structure that bolsters the company's capital sufficiently to achieve a triple-A rating. Rating agencies, while not intimately involved in the process, have been privy to the planned structure so as to offer ratings guidance, the source says. While progress has been achieved, the rescue could still collapse, the person adds.

Fashioning a bailout for the monoline bond insurers, which of late have been at the heart of concern for Wall Street, has been a complicated matter. It could result in the firms taking warrants that convert into stock in exchange for offering up capital. Talk of a possible line of credit also has been circulating, but that could be a more delicate matter because the rates the banks might request may fly in the face of Ambac's current double-A rating.

"If these banks are pretending these companies are triple-A, it's really all a sham," said Edward Grebeck, CEO of Tempus Advisors in Stamford, Conn. "This

rescue resembles two drunks standing on a corner trying to hold each other up, frankly." The executive notes that capital-constrained firms Citi, Wachovia, UBS and SocGen have all written down billions in soured debt.

New York Insurance Superintendent Eric Dinallo has been scrambling to orchestrate a viable rescue plan. The superintendent has been aggressively mediating between banks, brokers and rating firms and is perhaps part of the reason a plan for Ambac has come together. The official must give the blessing for a breakup of insurers into a "good insurer/bad insurer" model. A bailout plan for closely-held guarantor Financial Guaranty Insurance Co. also was floated earlier in the month, but the progress of that arrangement could not be learned.

A Dinallo spokesman declined to comment on the latest developments in the Ambac rescue, other than to offer the agency's stock statement.

"We continue to be engaged in and fully supportive of the bond insurers' ongoing efforts to resolve their current problems. As insurance regulators, it is our responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. We are encouraged by any developments that further these goals in this important market," it read.

Monolines have been under fire from rating agencies, which are pushing them to raise billions in capital to protect against losses in risky businesses that they began to provide guarantees on in the late 1990s and early 2000s.

Ambac and FGIC already have been downgraded by rating firms to double-A from triple-A. High credit ratings are critical for these companies, which provide backstops and credit enhancements on securities from municipal bonds to funkier mortgage paper.

MBIA, the largest guarantor, has raised some $2.5 billion in fresh capital from private-equity firm Warburg Pincus and public investors, but still faces a downgrade by Moody's Investors Service that could be leveled as soon as next week. On Thursday, MBIA decided to

distance itself from a trade association, the Association of Financial Guaranty Insurers.

Potential downgrades at the bond insurers have huge implications for holders of municipal debt and banks and brokers, because it could mean that those groups would face massive losses if the insurers that backstop the debt see their ratings slashed.

MBIA, like other insurers, has been continuing to claim that it is a solvent entity that can pay claims even under the most treacherous mortgage downturn scenario.

Numerous proposals have so far been put on the table, including one from activist investor

Bill Ackman that also pitches his variation on a split-up. Ackman's offering has been maligned by MBIA because it might result in bankrupting the holding entities of the insurance company subsidiaries and score the hedge fund manager billions in profits for his bets that the guarantors will fail.

The details of a bailout plan for Ambac will be closely watched, should it come to fruition, as a possible model for other bond insurers.