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: Quote, Profile, Research), 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: Quote, Profile, Research), BNP Paribas (BNPP.PA: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research), Allianz's (ALVG.DE: Quote, Profile, Research) Dresdner Bank, Royal Bank of Scotland Group Plc (RBS.L: Quote, Profile, Research), Societe Generale (SOGN.PA: Quote, Profile, Research), UBS AG (UBSN.VX: Quote, Profile, Research) and Wachovia Corp (WB.N: Quote, Profile, Research).

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