Oct. 29 (Bloomberg) -- Ambac Financial Group Inc. is pushing for government help in backstopping its bond insurance portfolio, breaking ranks with competitor MBIA Inc., which said the U.S. Treasury should stick to its main plan of buying troubled mortgage assets and investing directly in financial companies.

Ambac Chairman Michael Callen has said bond insurers may be willing to guarantee some of the securities the government plans to buy as part of its Troubled Asset Relief Program, as long as the Treasury acts as a backstop. The New York-based company, in an Oct. 28 letter, expanded on the idea by proposing an ``excess of loss portfolio guarantee program offered to entities that traditionally buy and hold credit risk.''

``This group would include U.S. financial guarantors, whose credit ratings have been threatened and whose access to the capital markets has been denied due to the potential volatility of the performance of their portfolios,'' Ambac said in the letter to Lindsay Valdeon, deputy executive Treasury secretary.

Armonk, New York-based MBIA in a separate letter to Treasury Secretary Hank Paulson, said government guarantees may not be the best method for improving the market.

``We firmly believe other elements of the TARP, in particular the Direct Purchase Program and the Direct Investment Program, will be more efficient and effective in achieving the Treasury's goals,'' MBIA said in the letter on its Web site.

At the end of March, MBIA insured $668 billion of debt and Ambac insured $551 billion of bonds.

Ambac's Plan

Congress this month gave the Treasury the authority to go forward with a $700 billion bailout of banking companies that has expanded to include capital injections, bond guarantees and greater protection for deposits. An initial $125 billion was allocated last week to buy shares in nine of the largest U.S. banks and another $125 billion was set aside for small lenders.

Government guarantees on securities could benefit the bond insurers in two ways, Peter Poillon, a spokesman for Ambac, said in an interview. The Treasury could provide an ``excess of loss'' protection to bond insurers by agreeing to cover losses on individual securities or types of securities after they break through a set threshold, Poillon said.

The bond insurers would pay the government premiums for the additional coverage on a ``fair and arm's length basis,'' Poillon said. In turn, investors would have better visibility about the potential losses bond insurers could suffer, helping to restore confidence, he said.

Elizabeth James, a spokeswoman for MBIA, had no immediate comment.

The Perfect Security

Bond insurers also could benefit from a government guarantee on securities held in the companies' asset management units.

Several bond insurers, including Ambac, may be required to post collateral against investment contracts if their insurance units are downgraded further by credit rating companies. That may force the companies to sell securities that have fallen sharply in value with the shortfall being made up by the companies' bond insurance units which back the investment contracts.

``Ambac could put a wrap on the assets and have the government backing on top of that,'' said Poillon. The securities would then trade as government guaranteed securities, he said.

``Now you have a security that you can sell at anytime,'' said Poillon.

Five of seven bond insurers, including MBIA and Ambac, lost their top AAA ratings this year as losses surged on securities linked to subprime mortgages. As the insurers' ratings collapsed, cities and states saw the value of their bonds drop and banks that had purchased protection against a decline in the securities they held were forced to take writedowns.

Insurers met in New York on Oct. 21 with regulators, including Wisconsin Insurance Commissioner Sean Dilweg, to discuss a proposal for Treasury to help stabilize bond insurers' ratings.

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

Last Updated: October 29, 2008 16:49 EDT