Banks are close to working out a rescue plan for troubled bond insurer Ambac Financial Group, though no deal has been reached yet, according to people familiar with the matter.
Talks are expected to continue through the night, and the banks hope to reach an agreement by Wednesday morning. Ambac's stock rose sharply on CNBC's report that that a deal was close, though there is always the danger that the talks could fall apart at the last minute.
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.
As first reported by CNBC, the bailout effort ran into trouble last week 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.
One possibility is to have Ambac raise more capital by issuing more stock through a secondary rights offering. The banks also are willing to consider leaving the bond insurer with just a single "triple-A" credit rating, according to people involved in the deal. In the past, the bank consortium had wanted two triple-A ratings to underwrite new business.
People close to the proposed bailout remain confident a deal will still happen. 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.