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Ambac Bailout Hits Snag, Though Talks Continue

Charles Gasparino, |On-Air Editor
Friday, 29 Feb 2008 | 10:26 AM ET
AP

The bailout of troubled bond insurer Ambac has hit a significant snag, after rating agencies demanded more capital from the consortium of banks involved in the bailout effort, CNBC has learned.

People close to the deal are confident that it will still happen, because the banks and the rating agencies are aware that, if it collapse, there will be a huge decline in the stock market.

The snag was hit Wednesday, when raters said they wanted to see more capital injected in the bond insurer if it is to get a triple-A rating, after the consortium of banks had agreed to come up with $2.5 billion in capital.

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The structure proposed by the consortium of banks was essentially dividing Ambac into a "good bank/bad bank" model by splitting up the municipal bonds book, considered more attractive, from the collateralized debt obligations (CDOs) book.

The consortium will now come up with another structure, which keeps the two together, which could mean that they would need even less capital to keep their triple-A rating, sources close to the deal said.

If the new structure is approved by the rating agencies, a deal could be put into place by early next week, and talks are likely to occur over the weekend, the sources said.

Banks