A consortium of banks is planning to underwrite a private sale of as much as $2.5 billion of Ambac stock to shore up the bond insurer's capital, which the banks hope will allow Ambac to keep its crucial triple A debt rating, CNBC has learned.
Like other bond insurers, Ambac got into trouble by moving beyond guaranteeing safe municipal bonds and insuring risky subprime-related debt. The resulting loses have threatened Ambac's triple A rating, which it needs to attract new clients.
Ambac's current clients, including many of the banks involved in the rescue effort, were worried that a downgrade of Ambac would force them to write down more of their own subprime-related debt. Citigroup are among the banks leading the rescue effort that held these risky bonds, known as collateralized debt obligations, or CDOs, enhanced by Ambac's Triple A rating.
Banks have had to revise earlier bailout proposals for Ambac because some or all of the three major ratings agencies--Moody's, Standard & Poor's and Fitch--weren't satisfied with the structure given the structure given the amount of capital the banks were putting into the transaction.