Ambac may be broken in half

Bond insurer Ambac Financial Group Inc. is in discussions to split itself up in a move aimed at ensuring that municipal bonds backed by the company retain high credit ratings, the Wall Street Journal said on its website Monday.

A deal could fall apart because of the complexities in such a move, said the report, quoting a source familiar with the situation.

A halving of Ambac would create one unit to insure municipal debt and one that would cover loss-ridden bonds tied to mortgages in a structure that would in effect create a “good bank” and a “bad bank,” the report said.

A spokesman for Ambac wasn’t immediately available to comment.

Last week, FGIC Corp., a bond insurer that has lost its top credit ratings, told New York regulators it wanted to split into two companies.

U.S. bond insurers, which guarantee more than $2.4 trillion of debt, have been hit hard by the sub-prime lending crisis and are struggling to keep the top ratings that are crucial for them to win new business.

New York State Insurance Supt. Eric Dinallo said last week he was making “good progress” in negotiations with the companies and major banks on a possible financial rescue for the industry.

Ambac’s shares, which fell 31 cents to $10.22 on Friday, have dived 89% since May.