Feb. 1 (Bloomberg) -- New York Insurance Superintendent Eric Dinallo is trying to organize a bank-led rescue of Ambac Financial Group Inc. to prevent downgrades of the bond insurer that may roil credit markets, according to two people briefed on the plan.

Eight banks including Citigroup Inc. and UBS AG have formed a group to provide financing, said one of the people, who declined to be identified because the details haven't been completed. Separate groups have begun working on similar plans to provide capital to MBIA Inc., the largest bond insurer, and Financial Guaranty Insurance Co., two people said.

``While we cannot discuss specifics, there are a number of developments relating to the bond insurers,'' Dinallo said in a statement today. ``We are continuing to communicate with all parties to help them reach firm deals as soon as possible.'' Ambac spokesman Peter Poillon didn't return calls seeking comment.

Fitch Ratings stripped Ambac, the second-largest bond insurer, of its AAA rating last month, casting doubt on the company's guarantees on about $556 billion of municipal and structured finance debt. Standard & Poor's and Moody's Investors Service Inc. are reviewing their top ratings on the New York- based company. Reductions would lead to asset writedowns for banks that depend on the insurers for coverage of securities.

Ambac climbed $1.56, or 13 percent, to $13.20 at 4:15 p.m. in New York Stock Exchange composite trading. The company has declined more than 80 percent in the past 12 months.

Reinsurance Plan

One of Dinallo's proposals to rescue the company would have banks and securities firms act as reinsurers of bonds and securities that Ambac guarantees, one of the people said. Ambac would pay an upfront fee in return for a promise that the banks would reimburse it if insurance-related losses exceeded an agreed-upon limit, the person said.

Another option would be for banks to provide the bond insurer with capital to help it pay claims. The banks discussing a possible Ambac rescue also include Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, one of the people said.

``Wachovia recognizes the importance of the monoline insurance industry to the financial services sector,'' said spokeswoman Christy Phillips-Brown. ``We would be supportive of efforts to add stability to the system.''

The investment bank Greenhill & Co. is advising the Ambac group, people familiar with the matter said. John Liu, Greenhill's chief financial officer and spokesman, didn't return a call requesting comment.

Company by Company

The banks discussing MBIA and FGIC weren't named by the people familiar with the discussions. Dinallo and the financial institutions that stand to lose money in the event of a downgrade have been moving to a company-by-company approach to reviving the industry.

``The likelihood of getting an industry solution is not very high,'' said Merrill Lynch & Co. Chief Executive Officer John Thain during a conference call earlier this week. ``It's quite likely that we get recapitalization or restructuring type of solutions for the individual companies.''

Ambac scrapped a plan last month to sell $1 billion of shares or convertible notes after the bond insurer's stock plunged 70 percent in two days. The plan provoked a boardroom dispute and led to the departure of CEO Robert Genader.

MBIA Inc., the largest bond insurer, this week received $500 million from private-equity firm Warburg Pincus LLC., which has also agreed to backstop another equity raising of at least $500 million. The insurer also sold $1 billion of surplus notes.

`Pressure is On'

``MBIA has already had $2 billion in capital infusions,'' said Jeffrey Kleintop, the chief market strategist who helps manage $163 billion for LPL Financial Services in Boston, in an interview on Bloomberg Television today. ``Ambac has not seen any. The pressure is on to make sure they get what they need before S&P has to take some action.''

MBIA CEO Gary Dunton said yesterday the world's largest bond insurer has more than enough capital to keep its AAA grade and dismissed speculation the Armonk, New York-based company may go bankrupt. MBIA rose 86 cents, or 5.6 percent, to $16.36.

Financial Guaranty, a unit of New York-based FGIC Corp., lost its AAA credit rating at Fitch Ratings Jan. 30 after missing a deadline to raise capital.

Willard Hill, a spokesman for MBIA, and Brian Moore, a spokesman for FGIC, didn't immediately return calls left after regular business hours today.

$15 Billion

In a meeting with banks and securities firms last week, Dinallo proposed several possibilities for saving insurers, including a line of credit that may be as much as $15 billion, said one of the people familiar with the negotiations.

Spokeswomen Christina Pretto of Citigroup, Rohini Pragasam of UBS, Carolyn McAdam of Royal Bank of Scotland and Christelle Maldague of BNP Paribas declined to comment, as did spokesmen Alistair Smith of Barclays and Martin Halusa of Dresdner.

The U.S. doesn't have a federal agency that regulates the insurance industry and instead leaves the task to the states. Dinallo is working on the plan for the bond insurers in consultation with New York Governor Eliot Spitzer and officials from the New York Federal Reserve Bank.

``We wouldn't want to do anything without feeling we'd be moving in alignment with what the feds believed was the right thing to do,'' Spitzer said in an interview last week.

Federal Regulators

Federal regulators may object to letting banks prop up Ambac because the maneuver may artificially delay writedowns of debt holdings, said Joshua Rosner, managing director at New York-based research firm Graham Fisher & Co.

``Those losses might ultimately happen anyway,'' Rosner said in an interview last week.

Ambac is projected to lose $11.6 billion on guarantees of mortgage-linked debt and other securities, according to William Ackman, managing partner at hedge fund Pershing Square Capital Management LP.

The losses were calculated using a model supplied by an unnamed investment bank, and the findings were sent in a letter to Dinallo and the Securities and Exchange Commission. Ackman has trades set up that would profit from a decline in the price of the shares and bonds of MBIA and Ambac.

To contact the reporters on this story: Erik Holm in New York at eholm2@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: February 1, 2008 18:30 EST