Ambac Bankers Rushing To Work Out Revised Bailout

Charles Gasparino, |On-Air Editor

News that the bailout of troubled bond insurer AmbacFinancial Group has hit a snag is sparking a flurry of activity among bankers to get a deal done quicky, according to people involved in the talks.

As first reported by CNBC, the bailout effort ran into trouble on Wednesday when the bond rating agencies said they wanted to see more capital injected into the bond insurer. A consortium of banks had already agreed to come up with $2.5 billion in capital.

Like other bond insurers, Ambac is in danger of losing its critical triple A debt rating unless it raises enough capital to offset billions of dollars in losses from risky subprime related debt.

Early Friday afternoon, Moody's said that Ambac will likely lose its triple A rating if a bailout plan isn't worked out. Standard & Poor's made similiar comments earlier in the week.

The banks are now trying to come up with a different type of structure for the bailout that will satisfy the rating agencies.

People close to the proposed bailout remain confident a deal will still happen, possibily by sometime next week. Banks and the rating agencies are aware that if Ambac collapses, it would trigger another wave of panic in debt markets and send the stock market reeling.

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.