Feb. 21 (Bloomberg) -- MBIA Inc.'s new Chief Executive Officer Jay Brown, under pressure to come up with a plan to rescue the troubled company, said bond insurers must separate their municipal guarantees from asset-backed securities.

MBIA left its main trade association because the group didn't share the company's vision for the industry, Brown said today in a statement. Bond insurers should also stop issuing credit-default swaps, Brown said.

``The industry must over time separate its business of insuring municipal bonds from the often riskier business of guaranteeing other types of securities, such as those linked to mortgages,'' Brown said in the statement.

Brown, who became CEO this week after the ouster of Gary Dunton, has wasted little time in setting a new agenda for the world's largest bond insurer, which is threatened with losing its AAA credit rating after losses on subprime mortgage securities. Under Dunton, Armonk, New York-based MBIA resisted changing and just last week told a congressional hearing that it had enough capital and was being unfairly criticized.

Brown ``is signaling that setting up some form of good insurer and bad insurer is a live possibility for MBIA,'' said Donald Light, an insurance analyst at Celent, a consulting firm in Boston. ``It looks like there may end up being two distinct businesses,'' Light said in a telephone interview.

FGIC Corp. of New York sought permission from regulators to split up last week. Ambac Financial Group Inc., which replaced its CEO last month, said this week it isn't planning a similar move. Ambac is ``looking to protect the rights of all policy holders,'' spokeswoman Vandana Sharma said Feb. 19.

Shaping the Future

MBIA fell 28 cents to $11.90 in New York Stock Exchange composite trading today.

Members of the Association of Financial Guaranty Insurers are ``surprised at the withdrawal of MBIA,'' Sean McCarthy, the trade group's president and chief operating officer, said in a statement. The group ``has not taken a position'' on member firms' organizational structures or lines of business, he said.

``AFGI remains committed to supporting the industry and its members who offer credit enhanced products in the municipal and asset-backed markets,'' McCarthy said.

Brown's Return

Brown, who had been CEO from 1999 through early 2004, was brought back to help the company regroup from its ill-managed expansion beyond municipal debt into guaranteeing collateralized debt obligations and other mortgage-linked securities. Those guarantees led to a record net loss last year, contributed to an 83 percent slump in share price and put the company's AAA bond insurance credit ratings in jeopardy.

CDOs package mortgage bonds, leveraged buyout loans and other assets and use the income from the debt to pay investors in the new security.

``It is up to us to shape our future in a way that we believe is most responsive to the markets, our policyholders and our owners, and we must do so without the constraints of participation in an industry association that does not always share our views,'' Brown said in the statement.

Willard Hill, a spokesman for MBIA, didn't immediately return a telephone phone call seeking comment.

Brown, 59, said in an interview earlier this week that his company may separate its business.

Reviving MBIA

Brown will be responsible for restructuring and reviving MBIA, which places its AAA stamp on $673 billion of debt. The loss of that rating would cast doubt on rankings of all debt the company guarantees, potentially sparking higher borrowing costs for municipalities and leading to losses for banks that relied on the guarantees to bolster the value of subprime securities. New York Insurance Superintendent Eric Dinallo said last week a breakup of the bond insurers may be needed to protect the rankings of $1 trillion of municipal debt from subprime losses.

Brown said earlier this week he had already discussed MBIA's plans with Dinallo who provided ``helpful guidance.'' Dinallo, who is taking the lead among the nation's insurance regulators, brought in Warren Buffett to start a new insurer and also asked the billionaire investor to value the guarantors' municipal business.

``As soon as Brown stepped in and said he wanted to have a close and friendly relationship with the New York State Insurance Department, that meant that splitting is now going to be considered,'' Light said.

Dinallo's spokesman, David Neustadt, had no comment on today's development.

Moody's Investors Service, which has AAA ratings on the insurance arms of MBIA and Ambac, has said it plans to complete a review of the ratings by the end of the month. Standard & Poor's is also considering a downgrade of the companies' ratings. Fitch Ratings cut Ambac to AA last month.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net; Romaine Bostick in Washington at rbostick@bloomberg.net

Last Updated: February 21, 2008 19:21 EST