Bond insurer FGIC seeks break up

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NEW YORK (CNNMoney.com) -- Troubled bond insurer Financial Guaranty Insurance Co. asked New York state insurance regulators to split its troubled structured finance arm from its healthy municipal bond insurance business, New York Insurance Superintendent Eric Dinallo said Friday.

In a televised interview, Dinallo told CNBC that the New York-based FGIC proposed the offer after seeing its credit rating downgraded by the Moody's Investors Service a day earlier.

Calls to FGIC were not immediately returned.

Moody's downgraded FGIC to a 'A3' rating from 'AAA' Thursday, citing the company's weakened capital position and its exposure to the mortgage market.

As part of the plan, FGIC would essentially split into two firms - one focused on its sound municipal bond business, the other on the troubled structured finance portion of its portfolios - ultimately protecting the insurers' municipal bond customers.

Dinallo, who has been spearheading rescue efforts for the troubled industry, warned however that the break-up was "not a done deal."

Bond insurers like FGIC, Ambac (ABK) and MBIA (MBI) have occupied much of Wall Street's attention lately.

The three firms, among others, guaranteed billions of dollars worth of toxic mortgage-backed securities in recent years that have plummeted in value. Worried that they will not be able to handle existing claims and retain enough capital, the credit rating agencies have threatened to strip them of their top-notch 'AAA' ratings.

Such downgrades would not only cripple the insurers' municipal and corporate debt insurance business, but would spread across the broader financial landscape, possibly resulting in further writedowns at major U.S. financial institutions.

A downgrade would most likely raise the cost of issuing municipal bonds, which directly affects local governments and could create an additional drag on the already troubled U.S. economy.

On Thursday, Congress waded into crisis as lawmakers tried to both assess blame and prescribe a remedy.