Oct. 17 (Bloomberg) -- Ambac Financial Group Inc. surged as bond insurers try to tap into a U.S. Treasury plan to stabilize the financial system that may include selling or insuring assets.

Ambac rose 83 cents, or 31 percent, to $3.49 in New York Stock Exchange Composite trading after earlier climbing as much as 46 percent.

Ambac and other bond insurers may sell assets to the Treasury or back securities on bank balance sheets with a government backstop, Chief Executive Officer Michael Callen said yesterday in an interview.

Insurers will meet in New York on Oct. 21 with regulators, including Wisconsin Insurance Commissioner Sean Dilweg, to discuss a proposal for Treasury to help stabilize bond insurers' ratings, the Wall Street Journal reported today.

Five of seven bond insurers, including MBIA Inc. and Ambac, lost their top AAA ratings this year as losses surged on securities linked to subprime mortgages. As the insurers' ratings collapsed, cities and states saw the value of their bonds drop and banks that had purchased protection against a decline in the securities they held were forced to take writedowns.

Bond insurers may guarantee securities, agreeing to take the first losses in a default, with the government acting as a backstop, Callen said in the interview with Bloomberg News.

`Liquidity Trap'

Such a plan would allow the securities to trade at their full face value, unlocking ``the liquidity trap that these assets find themselves in,'' Callen said.

Callen said he isn't asking Treasury to take a stake in Ambac.

Credit-default swaps on Ambac's bond insurance unit fell 5 percentage points today to an upfront cost of 33.5 percentage points, according to CMA Datavision in London. That means it would cost $3.35 million initially, plus $500,000 a year for five years, to protect $10 million in securities that are guaranteed by the insurer.

Credit-default swaps, conceived to protect creditors against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to pay on debt or if the bond insurers are unable to make good on their guarantees.

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

Last Updated: October 17, 2008 16:38 EDT