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Ambac Posts $3.3 Billion Loss, But Shares Surge

Ambac Financial Group reported a quarterly loss of $3.3 billion Tuesday after recording massive credit derivative write-downs, but its shares surged after the bond insurer said it hopes to find much-needed capital "reasonably soon."

Ambac said it also hopes its main insurance unit will regain its top credit rating, which it lost on Friday, from Fitch.

Ambac needs to raise capital after recording a $5.2 billion pre-tax write-down in the fourth quarter for credit derivatives positions linked to assets including mortgages.

It had planned to issue $1 billion of equity or convertible securities to boost capital, but decided last week that market conditions were not good enough.

The company is still looking at other ways to raise capital and has received "a lot of interest," interim Chief Executive Michael Callen said on a conference call.

While the company gave no assurances on the future, the hopes it expressed were enough to boost a stock that has been hammered over the past year.

Shares of Ambac and its top rival, MBIA, both jumped. Ambac shares were up more than 34 percent to $8.35 in afternoon trade, while MBIA rose more than 40 percent to $12.15.

Even with Tuesday's gains, Ambac's shares have fallen 90 percent since the beginning of 2007 and more than 65 percent since the end of 2007. MBIA shares have fallen more than 80 percent since the beginning of 2007 and about 35 percent since the end of 2007.

In the near term, Ambac still faces major hurdles. Chief Financial Officer Sean Leonard said on the conference call that its new business had already been declining in the fourth quarter and first part of January, and should decline further after the Fitch ratings cut.

More ratings cuts may be on the horizon for Ambac's main units. Moody's Investors Service and Standard & Poor's are also considering cutting Ambac Assurance's top debt ratings, and Fitch said on Friday it may cut Ambac Assurance's ratings again, after already lowering them two notches to "AA."

Difficulties at the bond insurers could force investors to sell billions of dollars of securities and roil bond markets. Ambac's trouble came after it used credit derivatives to guarantee a series of portfolios of asset-backed securities.

Many of those asset-backeds were linked to subprime mortgages and have weakened dramatically in the widening credit crisis. Ambac's difficulties generally come from its key growth strategy over the last decade -- expanding net income by providing more insurance to repackaged consumer debt. That business was much riskier than its original business of mainly insuring municipal bonds against default.

"We got too complex," said Callen.

Internal Capital

Ambac recorded the write-downs after giving more credence to a different loss calculation methodology.

The company can help boost capital just by collecting payments on policies already written and other business.

Leonard estimates the company generates $1 billion of capital internally a year.

Ambac said on Jan. 16 that it was cutting its quarterly dividend to 7 cents a share from 21 cents.

In addition to the $5.2 billion write-down, Ambac set aside $208.5 million for losses.

On a per-share basis, Ambac's fourth-quarter loss was $31.85. A year earlier it earned $202.7 million, or $1.88 a share.