Jan. 24 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer whose shares have plunged 87 percent in a year, rose in extended New York trading on speculation billionaire Wilbur Ross may buy the company.

Ross, who became a billionaire by buying distressed steel and textile businesses, is in talks to buy New York-based Ambac, the Evening Standard reported, citing people it didn't name. A deal may come within the next two weeks, the newspaper reported on its Web site.

Ambac jumped $1.67, or 15 percent, to $13, after dropping 17 percent in regular trading. Ambac has tumbled in the past year after losses on subprime mortgage securities caused the company to lose its AAA credit rating at Fitch Ratings. The New York Insurance Department is pushing banks to unite to rescue the bond insurers, who guarantee a combined $2.4 trillion of debt.

``The market would be tremendously relieved by news that somebody's coming in and capitalizing them to get an unambiguous AAA rating,'' said John Tierney, credit strategist at Deutsche Bank AG in New York.

A message left for Ross wasn't immediately returned, nor was a call to Peter Poillon, a spokesman for Ambac.

Ross said earlier this week that he may invest in a bond insurer.

``We have been looking at the financial guaranty insurance companies,'' Ross, chairman of New York-based WL Ross & Co., said in a Bloomberg Television interview. ``They all need capital. I think one or two will likely fail but I do believe'' that it is a valid business model.

`Solid Business'

The once unquestioned strength of AAA rated bond insurers is being reassessed on concern by Fitch, Moody's Investors Service and Standard & Poor's that the companies don't have the capital to cover losses stemming from downgrades on subprime mortgage bonds and collateralized debt obligations they guaranteed.

``What happened was the industry had a very safe, long-term business, namely in municipal bonds,'' Ross said. ``That was a very straightforward, very good, solid business.''

Ross may start a new bond insurer, the Financial Times reported on its Web site today. TPG Inc. also may start a guarantor, following billionaire investor Warren Buffett, who set up a company last month.

Ambac said this week it is ``considering strategic alternatives'' after reporting its biggest-ever loss and scrapping plans for a capital raising. The fourth-quarter net loss was $3.26 billion after the company wrote down the value of credit derivatives tied to loans made to homeowners with poor credit by $5.21 billion.

CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities, have accounted for the biggest portion of the $133 billion in writedowns and credit losses since the beginning of 2007 at more than 20 of the world's largest banks and securities firms.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net

Last Updated: January 24, 2008 17:43 EST