Feb. 29 (Bloomberg) -- Citigroup Inc. helped create at least $6.9 billion of securities insured by Ambac Financial Group Inc. that have tumbled in value and may require the insurer to pay claims, according to research by Tavakoli Structured Finance Inc.

Of the $22 billion of collateralized debt obligations linked to the mortgage market and insured by Ambac, about $7.5 billion were underwritten by Citigroup, which is among banks seeking to help Ambac raise capital. Of those CDOs, $6.9 billion, or 92 percent, are experiencing so-called events of default, Tavakoli said. Such events signal the most-senior classes may not be paid in full.

Ambac of New York is in talks with banks to raise money to satisfy Moody's Investors Service and Standard & Poor's that it has enough capital to remain top-rated after posting more than $5 billion of losses related to guarantees on CDOs, which package pools of debt and slice them into new pieces. New York-based Citigroup is among a group of banks in discussions to help Ambac.

``Given the deterioration in these deals, Ambac may experience substantial principal losses, and capital suppliers may view the portfolio as financial guarantees on non-investment grade products,'' Janet Tavakoli, president of Tavakoli Structured Finance, wrote in a Feb. 18 research report. ``It is no surprise that the major underwriters of the CDO deals on Ambac's books are participating in the rescue.''

Citigroup spokeswoman Danielle Romero-Apsilos declined to comment. Paul Burke, a spokesman for Ambac, didn't return a call seeking comment.

Ackman's Data

Tavakoli based her research on data released by Pershing Square Capital Management. Pershing Square, led by hedge fund manager Bill Ackman, has a short position on Ambac and Armonk, New York-based MBIA Inc. The firm released a list of MBIA- and Ambac-guaranteed CDOs backed by subprime mortgages along with a model that allows investors to forecast possible losses by the companies.

Ackman's model has been criticized by Ambac and MBIA as exaggerating the likely losses, which Ackman put at about $12 billion each.

Ambac-insured CDOs originated by Citigroup that are experiencing an event of default include Diversey Harbor ABS CDO, Ridgeway Court Funding I and II, 888 Tactical Funding, Class V Funding III and Adams Square Funding II, according to an S&P report dated Feb. 22.

Ambac's bailout hit a snag this week after ratings companies demanded more capital, CNBC reported today, citing people familiar with the situation.

Moody's said today that it's giving Ambac more time to raise more capital.

Attachment Points

Merrill Lynch & Co. was the largest originator of CDOs backed by subprime mortgages that were later insured by MBIA, according to Tavakoli. The bank underwrote 11 of 22 deals, and four of those CDOs have experienced an ``event of default,'' according to Tavakoli.

MBIA said it expects claims of about $200 million on CDOs backed by subprime mortgages. Ambac estimated in the fourth quarter that it could pay claims of more than $1 billion.

MBIA's estimates are likely to rise even though the firm has backed some bonds at high so-called attachment points, Tavakoli said. The percentage of losses that must occur on a CDO before the bond insurer has to start paying is the attachment point.

Forge ABS High Grade CDO, a Merrill-originated deal that has an attachment point of 70 percent, is among the CDOs that may result in losses for MBIA, Tavakoli said.

Willard Hill, a spokesman for MBIA, declined to comment on any specific transactions, which he said MBIA had agreed to keep confidential.

``Events of default are structured as early warning signs so that the bond insurer can take control of the cash flow for the benefit of the senior note holders and of the oversight of the CDO to better manage its exposure,'' said Hill.

Merrill Lynch spokeswoman Danielle Robinson declined to comment.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net

Last Updated: February 29, 2008 12:47 EST