June 5 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc. may give up attempts to retain the Aaa credit ratings of their bond insurance units after Moody's Investors Service put them under review for a second time this year.

The world's largest bond insurers, which have raised $4.1 billion combined in the past six months, said they won't seek more capital after New York-based Moody's yesterday said the most likely result of its examination would be a downgrade of the companies' top insurance financial strength rankings.

``You can't go to somebody to raise capital if you don't know what the rules for capital raising would be,'' MBIA Chief Executive Officer Jay Brown told reporters yesterday. ``Goal posts move, targets change.''

Brown and Ambac interim CEO Michael Callen were hired this year largely to fulfill one key mission: save the bond insurers' Aaa credit ratings. More than $1 trillion of municipal bonds and corporate securities the companies guaranteed depend on those top ratings, as does the capacity for New York-based Ambac and Armonk, New York-based MBIA to generate enough new business.

``The ability of MBIA and Ambac to continue as viable ongoing companies is highly in doubt,'' according to a note from Rob Haines and Craig Guttenplan, analysts at debt research firm CreditSights Inc. in New York. ``How can a triple A be justified for a company that cannot sell its product, is facing mounting losses and has no access to the capital markets?''

Moody's put Ambac and MBIA under review in January, only to affirm MBIA a month later and Ambac in March. The credit rating company cited ``meaningful uncertainty'' about Ambac's ability to regain market share since the first reviews, and ``diminished new business prospects'' for MBIA in yesterday's announcement.

Shareholder Losses

MBIA, Ambac and the rest of the industry stumbled after expanding beyond municipal insurance to guarantees on collateralized debt obligations that have since tumbled in value. Downgrades of the companies may trigger forced sales and losses for states, municipalities, investment banks and mutual funds.

Ambac reported a first-quarter net loss of $1.66 billion, compared with $213.3 million in net income a year earlier. MBIA posted a net loss of $2.4 billion. It had a profit of $198.6 million a year earlier.

MBIA, which dropped 15.8 percent yesterday to $5.63, a 20- year low, climbed 43 cents to $6.06 at 10:14 a.m. today in New York Stock Exchange composite trading. Ambac, which fell 17 percent to a record low yesterday, was 18 cents higher at $2.67.

Warburg Investment

MBIA, which counts private-equity firm Warburg Pincus LLC and Martin Whitman's Third Avenue Management LLC as its largest shareholders, has plunged 91 percent in the past year. Ambac's biggest investors, Fidelity Management & Research Co. and Davis Selected Advisers, have watched that stock plunge 97 percent.

Warburg Pincus bought 16 million MBIA shares in January at $31 each and about 25 million more at $12.15 in February. The New York-based firm also received warrants to buy additional shares.

MBIA Insurance Corp.'s financial strength rating likely will fall to the Aa range, though a drop to the A category is possible, Moody's said yesterday in a statement. Ambac Assurance Corp.'s ranking will probably be cut to Aa, Moody's also said.

``I don't think they're going to respond in any way to keep the rating,'' said Jim Ryan, an analyst with Morningstar Inc. in Chicago. ``I don't think there's anything they can do.''

New Business, Buffett

Moody's decision is ``liberating'' for Ambac, and may enable it to consider more options such as returning capital to shareholders, Doug Renfield-Miller, an executive vice president at the company, said at an investor conference.

MBIA may start a new insurance business with $900 million it raised in February, Brown said. Ambac shareholders have suggested the company stop writing new business and enter a ``run off,'' where it winds down as policies mature, Renfield-Miller said.

The companies also face competition from billionaire Warren Buffett's Berkshire Hathaway Inc., the largest shareholder in credit-rating company Moody's Corp. Buffett started a new bond insurer in December and is charging more than MBIA and Ambac to guarantee payment on municipal debt while avoiding the CDOs and other securities that jeopardized their credit ratings.

California Treasurer Bill Lockyer and Connecticut Attorney General Richard Blumenthal are among officials seeking a change in how Moody's and Standard & Poor's rate municipal bonds. States and local governments say they were forced to buy now worthless bond insurance because Moody's and S&P ``knowingly and systematically'' ranked municipal issues lower than they should have. reform may negate the need for bond insurance.

Market Disconnect

Until yesterday, MBIA and Ambac executives said they were focused on keeping Aaa ratings.

The prospect of downgrades earlier this year roiled markets because of concern that guarantees for more than $1 trillion of debt may be worthless.

``The disconnect between the market's perception and the rating agencies' assigned ratings has finally become an elephant in the room too big to ignore,'' Kathleen Shanley, an analyst at Chicago-based bond research firm Gimme Credit, wrote in a report yesterday.

Credit-default swaps tied to MBIA's insurance unit rose to a record. Sellers of five-year contracts demanded 23.5 percent upfront and 5 percent a year yesterday, according to London-based data provider CMA Datavision. That's up from 18.5 percent initially and 5 percent a year two days ago.

The upfront cost to protect Ambac debt jumped to 25.5 percent from 21.5 percent, CMA prices show. The contracts pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements or if it can't make good on its guarantees.

``It's next to impossible'' for the companies to raise capital, Andrew Wessel, an analyst with JPMorgan Securities in New York, told Bloomberg Television.

To contact the reporter on this story: Christine Richard in New York at crichard5@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: June 5, 2008 10:22 EDT