Ambac shares climb on rescue hopes

Those hopes were further fanned on Monday after the head of investment banking at Allianz's Dresdner Bank said the bank plans to support a rescue package.

"If what is now on the table comes to pass then we will take part in the package," said Stefan Jentzsch, adding Dresdner was ready to put up a sum in the low tens of millions of euros.

A person familiar with the matter said over the weekend that the deal would likely involve raising about $2.5 billion of equity and $500 million of debt. Any deal could happen as soon as Monday or Tuesday, a person familiar with the matter said on Friday.

Ambac should do more than raise new capital, said Rob Haines, analyst at independent research firm CreditSights. He said it should split up its municipal bond insurance business, which is not likely to suffer big losses, from its structured finance guarantee operations, which may.

"New capital would be a plus, but it would be a Band-Aid," Haines said, "and it wouldn't address the fundamental concern here, that there could be more deterioration in the structured finance business."

FGIC Corp earlier this month told New York insurance regulators that it wants to split off its muni business from its structured finance business.

Bond insurers are broadly looking to raise capital to stave off ratings downgrades, which would strip insurers of top ratings that are crucial for their business.

Ambac's main insurance unit has already lost its top rating from Fitch, while Moody's and Standard & Poor's are considering downgrading the insurer.

Ratings downgrades are a threat after the bond insurers made forays into using credit derivatives to guarantee risky portfolios of repackaged subprime mortgages and other debt. Expected losses have surged on those securities, forcing Ambac to post $5.2 billion of write-downs in the fourth quarter.

Ambac's shares were trading at $10.86 after rising as high as $11.49 in morning trading on the New York Stock Exchange. (Reuters)