Banks Attempt to Rescue Ambac, Other Insurers

Efforts to help bail out troubled bond insurers are escalating, with one group of big banks focusing on a potential rescue of Ambac Financial Group, CNBC has learned.

Moody's meanwhile, reaffirmed Friday that it is reviewing the coveted triple A ratings of the bond insurers and is likely to downgrade at least some of them in the coming weeks.

Bond insurers like Ambac used to insure just municipal bonds but have been burned by billions of dollars in losses after backing risky subprime-related debt. Losing their Triple A rating could be devastating for the bond insurers because it could prevent them from drumming up new clients and possibly force them out of business.

Banks, in turn, could face fresh writedowns of up to $70 billion if the bond insurers lose their top rating, according to Meredith Whitney, banking analyst at Oppenheimer.

The banking group working on a possible rescue includes RBS , Wachovia , Barclays , UBS , Societe Generale , BNP Paribas , Dresdner and Citigroup .

The group is attempting to negotiate with Eric Dinallo, the New York state insurance commissioner who is spearheading a rescue effort for the entire industry, a source familiar with the talks said.

Efforts to help Ambac may be one reason why Standard & Poor's affirmed Ambac's AAA credit rating late Thursday, while putting MBIA on a negative credit watch.

That move shocked traders because Ambac had been considered to be the much weaker of the two bond insurers. Also, MBIA had received a capital infusion from Warburg Pincus.

The source also said that the group is engaging Greenhill & Co. as an investment bank to advise it in the talks.

Robert Greenhill founded the boutique bank in 1996 after serving as vice chairman of Morgan Stanley and chairman of Smith Barney. He stepped down as CEO of Greenhill last fall, but remains chairman.

The source said "these are early days" for the group and would only say that a variety of solutions are being considered.

Meanwhile, a senior treasury official on Thursday applauded recent developments.

"I am encouraged by progress in the talks," the official said. "People who weren't talking with each other in the recent past are now getting down to business."

For some, this consortium might recall the failed effort to create a super SIV coalition among banks last fall to handle the commercial paper problem.

No one was saying this group would be any more successful. They only said a group of international banks has come together to explore solutions to one of the most vexing problems facing the market.

© 2009 CNBC.com