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 U.S. House Financial Services subcommittee about the state of the bond insurance industry.
Lawmakers have said government intervention may be needed to ease financial strains in the bond industry that are unsettling other areas of the economy.
While one major U.S. bond insurer cautioned members of a House subcommittee against stricter government rules or a bailout, another saw its credit rating cut over worries it may lack the reserve cash to cover surging defaults.
An offshoot of the mortgage crisis, the dislocation in the bond insurance industry is spreading beyond Wall Street, threatening the cost of financing everything from student loans to public works projects, officials say.
Credit-rating agency Moody's Investors Service on Thursday downgraded from "AAA" to "A3" securities of Financial Guaranty Insurance Co., saying it does not have enough capital in reserve to cover a potential spike in claims. Bond insurers essentially need a "AAA" rating to continue writing new business.