Investors Wait on Word of Ambac Rescue

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, according to sources. 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, CNBC 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 Citigroup, Wachovia Bank, Barclays Capital, UBS, Royal Bank of Scotland, BNP Paribas and Société Générale.

Ambac shares recently were up 2% to $10.92