Bond insurer recapitalization may be soon: Spitzer

By John Poirier and Karey Wutkowski

WASHINGTON (Reuters) - The recapitalization of U.S. bond insurers hit by the subprime crisis may occur soon, but if it fails, insurers can be forced to separate riskier activities from their municipal bonds business, New York state officials said on Thursday.

"The clear preference is a recapitalization of the companies, something that could happen at some point. We would hope shortly," Gov. Eliot Spitzer told reporters after testifying before a House Financial Services subcommittee about the state of the bond insurance industry.

Asked to be specific, Spitzer said: "It could happen within a couple of days."

New York State Insurance Superintendent Eric Dinallo has been working with banks on rescue plans for several of the bond insurers, which guarantee $2.4 trillion of debt. The companies are facing big losses from insuring bonds linked to subprime mortgages and other risky assets.

"Speed is important at this point," Spitzer said, referring to diminishing confidence that has hurt markets such as auction rate securities. "The time for delay has passed."

Executives from MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N), two major bond insurers, were among those who were scheduled to testify at the hearing.

MBIA said in testimony prepared for delivery at the hearing that lawmakers must support the capital raising efforts of the bond insurers because failure could have "far-reaching effects" on the economy.

The company also criticized short-sellers such as William Ackman, founder of hedge fund Pershing Square Capital Management, for what MBIA said was undermining market confidence in the bond insurers.

In a filing with the Securities and Exchange Commission, Pershing Square said it had 1 million put option positions in Ambac and 697,700 put options in MBIA as of December 31, 2007.

MBIA stock, which has fallen sharply since early 2007, was up more than 8 percent at $12.67 per share in late afternoon trading on Thursday on the NYSE. Ambac stock was up more than 14 percent to $10.70 per share.

STATE COULD FORCE RESTRUCTURING

Dinallo told reporters it was within the state of New York's power to force bond insurers to restructure to separate their municipal bond business from their riskier operations. Such a move would be an "extraordinary" measure, he said, and the first step would be for the bond insurers to present a plan to state regulators to separate into two operating companies.

The state could step in if the plans were not acceptable, Dinallo said.

"There are also legal abilities of the state to put a company into what's called a rehabilitation or a runoff or some form of bankruptcy," he said.

Spitzer said the clear preference is for the bond insurers to recapitalize.