Jan. 24 (Bloomberg) -- New York regulators are pushing the biggest U.S. financial institutions to rescue bond insurers, led by MBIA Inc. and Ambac Financial Group Inc., and avert credit- rating downgrades that may further disrupt financial markets.

Insurance Superintendent Eric Dinallo, who met with industry executives yesterday, is trying to bolster the bond insurers' ratings with help from banks and securities firms that posted $133 billion of writedowns and credit losses tied to mortgage securities. He's received encouragement from Federal Reserve Bank of New York President Timothy Geithner, said a person with knowledge of the matter.

The insurers may get fresh capital of as much as $15 billion, the Financial Times said on its Web site yesterday. The figure may be smaller, said a person familiar with the talks. The infusion would help stave off credit rating downgrades of MBIA and Ambac, the industry's two largest companies, and the $2.4 trillion of debt they guarantee. Banks would avoid billions more in writedowns on the value of subprime securities they had insured.

``The bond insurers scare people to death,'' said Harry Clark, who oversees about $1.3 billion as chief executive officer of Clark Capital Management in Philadelphia. ``It's big sighs of relief around Wall Street.''

News that regulators met with bankers prompted a global rally in stocks. The Standard & Poor's 500 Index halted a five-day slide, rising 2.1 percent to 1,338.60. The Nikkei 225 Stock Average gained 2.1 percent to 13,092.78 in Tokyo, and stock indexes in the U.K., Germany and France advanced more than 4 percent.

Shares Advance

New York-based Ambac lost its AAA grade from Fitch Ratings this month on concerns that losses tied to subprime mortgages may increase. Subprime loans are made to people with weak credit.

MBIA, based in Armonk, New York, rose 94 cents to $17.55 in early New York Stock Exchange trading after jumping 33 percent yesterday. Ambac added 64 cents to $14.34 after soaring 72 percent yesterday. MBIA closed at $73.02 a year earlier; Ambac was at $88.40.

New York's Insurance department is trying to ``stabilize the market and increase capital and capacity in the bond insurance market,'' agency spokesman Andrew Mais said yesterday.

The meeting in New York lasted about two hours and included some of the world's largest banks and securities firms, said the person, who wasn't authorized to speak publicly because the meeting was private. Among those represented were Goldman Sachs Group Inc., Merrill Lynch & Co., JPMorgan Chase & Co., Citigroup Inc. and Wachovia Corp., the person said.

Michael DuVally, a spokesman for Goldman, Merrill spokeswoman Jessica Oppenheim, JPMorgan's Tasha Pelio, Citigroup's Dan Noonan, and Wachovia'sChristy Phillips-Brown all declined to comment on whether their companies participated.

Global Effort

Any rescue plan may be fraught with the same difficulties that befell Treasury Secretary Henry Paulson's attempt last year to lead a combined bailout of structured investment vehicles, analysts said. The effort was ultimately dropped after banks failed to reach agreement.

A plan that limits participants to U.S. financial institutions may fail, said David Havens, an analyst at UBS AG in Stamford, Connecticut.

``Although it may be something they're trying with the best of intentions, trying to get everybody globally to agree on something would be like herding cats,'' Havens said in a report.

Paulson Monitoring

Paulson said earlier this week that he's monitoring the situation, although he declined to characterize the role his department is playing.

``We obviously have been looking at the monoline insurers carefully for some time now and we're actively engaged in watching that sector and talking with other policy makers about that sector,'' Paulson said Jan. 22, when asked after a speech in Washington.

Geithner, the New York Fed president, has taken a central role among U.S. regulators monitoring the financial health of bond insurers since October, said an official familiar with the matter. Geithner has requested government data on Wall Street's involvement, said the official, who wasn't authorized to speak publicly. Calvin Mitchell, a spokesman for the New York Fed, declined to comment.

``We view any potential bailout of the monolines as being in the very early innings, and feel it is by no means a certainty,'' Barclays Capital analysts wrote in a note to clients today. The New York insurance department also has a mandate to protect policyholders and may do that at the expense of shareholders in the parent companies, Barclays said.

``The market should realize that more detail is needed before a rally akin to yesterday's is really justified,'' Barclays said.

`Well Capitalized'

Sean Dilweg, the commissioner of insurance for Wisconsin, was among those present at the meeting. Ambac is primarily regulated by Dilweg's state.

``We look at Ambac as a solid company that is well- capitalized,'' Dilweg said. ``From a regulatory standpoint, we feel comfortable they can protect policyholders.''

Moody's Investors Service and Standard & Poor's are reviewing Ambac and MBIA for possible downgrades. Insured municipal bonds usually carry the debt rating of the insurer rather than the underlying debt.

If the bonds are downgraded, investors who are required to hold only the highest-rated securities may be forced to sell. The lower rating may also reduce the value of the holdings, forcing more writedowns at banks and securities firms.

Impossible to Gauge

The bond insurers sold credit derivatives to banks and other investors, taking on the risk of subprime securities such as collateralized debt obligations, and allowing banks to avoid writing them down as the underlying value of the securities slumped. Without their AAA ratings, the value of that protection is reduced and banks would be forced to take writedowns.

It's almost impossible to gauge how much banks stand to lose if the bond insurers are stripped of their AAA ratings as few have disclosed the extent of their hedges, Christian Stracke, a senior strategist in London at CreditSights Inc., a bond research firm, said in a report this week.

Merrill Lynch wrote down $1.9 billion of securities last week and Canadian Imperial Bank of Commerce was forced to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns after ACA Capital Holdings Inc. was cut 12 levels to CCC.

`Systemic Threats'

The bond insurers ``have rapidly come to be regarded as one of the key systemic threats in 2008,'' Stracke said. ``Judging from Merrill's experience with just one relatively small monoline, ACA, the more acute danger is in the form of CDS counterparty risk.''

Ambac and MBIA have suffered losses because of guarantees they sold for structured investments such as CDOs, which package pools of debt and slice them into pieces with varying ratings. The industry collectively guaranteed $127 billion of CDOs linked to mortgages that were given to borrowers with poor credit.

The securities have plunged in value as defaults by borrowers soared to a record in the third quarter of last year, according to the Mortgage Bankers Association.

Messages for Ambac spokesman Peter Poillon and MBIA's Michael Sitrick weren't returned yesterday.

Ajit Jain, who heads a new bond insurer started last month by Warren Buffett's Berkshire Hathaway Inc. to compete with MBIA, Ambac and others, said in a Jan. 9 interview that Berkshire was ``looking at ways to support the existing insurers in terms of reinsurance and capital.''

Jain, who also heads up the units that sell coverage for catastrophes and other large risks, declined to comment yesterday.

Default Risk

The risk of MBIA defaulting on debt rose today after tumbling yesterday, according to CMA Datavision. On a $10 million credit- default swap contract, investors are paying $1.4 million upfront and an additional $500,000 a year for five years. That had fallen to about $825,000, or 825 basis points, a year yesterday, CMA prices show.

Contracts on Ambac were little changed at about 13 percent upfront, or $1.3 million, and 5 percent, or $500,000, a year.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: January 24, 2008 09:11 EST