Update: Ambac plan sparks selloff

Stocks sold off Wednesday afternoon after Ambac (ABK) unveiled its long-awaited capital-raising plan. Ambac said it will raise $1.5 billion or more by selling “at least” $1 billion worth of common stock and $500 million worth of equity units.

“In this offering, we are targeting our core investor base, the long term holders of our stock, who have been loyal to Ambac,” said CEO Michael Callen.

The deal aims to preserve Ambac’s triple-A rating and save Wall Street banks that hold Ambac-insured bonds from another round of costly writedowns. Wednesday’s agreement comes six weeks after New York insurance regulators got the bond insurers, banks and ratings agencies talking in an effort to stave off a downgrade.

But in the form outlined in Wednesday’s press release, Ambac’s capital-raising plan is smaller than the arrangements being discussed in the press in recent days. Reports on CNBC and in the Financial Times had Ambac raising at least $2 billion.

“This capital raise, along with our recent strategic actions, our increased emphasis on risk-adjusted returns over the course of an economic cycle and a six-month suspension of the structured finance business, will strengthen our capital base,” Callen said. “We expect to be better positioned to take advantage of the current favorable market environment for credit enhancement.”

Ambac shares plunged 12% on the news. Shares of rival MBIA (MBI) dropped 4% after earlier trading higher on reports that an Ambac capital plan was near.