Shares slide on shake-up at Ambac

Shares of Ambac Financial Group Inc. plunged 39% on Wednesday after the bond insurer slashed its dividend by two-thirds, replaced its chief executive and said it would take a $5.4-billion write-down on its investment portfolio.

Ambac also said it planned to raise $1 billion by selling stock and other instruments as part of an effort to maintain its AAA financial strength rating.

The company’s stock tumbled $8.17 to $12.97.

Fitch Ratings has warned it would downgrade Ambac if it was unable to raise at least $1 billion to cover potential losses. Bond insurers essentially need a AAA rating to continue booking new business.

The fear is that in the wake of surging mortgage defaults Ambac and its competitors, even with new capital, might not be able to cover all the claims on the mortgage-backed bonds they have insured.

Rating firm Standard & Poor’s said Wednesday that it would start a new examination of bond insurers, one month after affirming their AAA ratings. S&P; cited its increased forecast for losses on sub-prime mortgages.

One of Ambac’s chief competitors, MBIA Inc., recently sold $1 billion in bonds to retain its AAA rating. But it reportedly had to pay a 14% interest rate to attract investors.