FGIC Concedes to Split

Closely held bond insurer Financial Guarantee Insurance Co. has told regulators it wants to separate its municipal and structured finance businesses, New York state Insurance Superintendent Eric Dinallo said Friday.

Dinallo, appearing on CNBC the morning after testifying on Capitol Hill that bond insurers should separate healthy parts of its business from the bad, said FGIC had made its wishes known. FGIC was hit late Thursday with a downgrade to A3 from triple-A by Moody's Investors Service, which followed earlier downgrades from Fitch Ratings and Standard & Poor's.

Losing its pristine triple-A rating is a major hit for the firm, undermining its ability to win new business underwriting municipal and corporate debt.

FGIC, whose investors include PMI Group(PMI Quote) and private-equity firms the Blackstone Group(BX Quote) and Cypress Group, has suffered along with rivals MBIA(MBI Quote) and Ambac Financial(ABK Quote), as the ratings agencies grow increasingly wary of their ability to guarantee the debt they insure.

Of particular concern are risky collateralized debt obligations, or CDOs, and other asset-backed paper the companies have increasingly insured in recent years. As the risk for default of the underlying mortgages has increased amid the housing slump and credit crisis that began last summer, so too did the risk the bond insurers will have to pay claims.

If the bond insurers themselves are downgraded, the debt they backstop also faces downgrades. That makes the debt unsuitable for some institutional investors.

As the crisis has mounted, both government and the financial sector have scurried to formulate plans to avoid catastrophe. Earlier on Thursday, a subcommittee of the House Committee on Financial Services hosted a hearing entitled "The State of the Bond Insurance Industry."

In that hearing, Dinallo floated a plan to separate the municipal debt and structured debt backed by the bond insurers to protect municipal bond holders and restore the guarantors' triple-A ratings.

The hearing also featured testimony from New York Gov. Eliot Spitzer and officials from the Securities and Exchange Commission, Federal Reserve and Fitch Ratings. It also pitted MBIA CFO Charles Chaplin and Ambac President and CEO Michael Callen on the same panel as hedge fund manager Bill Ackman, who has been betting on the bond insurers to fail since at least 2002.

MBIA fired back at Ackman at the hearing, saying his cage-rattling has been misleading and intended to support his short position.

Earlier this week, billionaire investor Warren Buffett offered to provide a second level of insurance to $800 billion in municipal bonds backed by the bond insurers. Ambac has publicly refused the offer and sources tell TheStreet.com MBIA has done the same.