Feb. 15 (Bloomberg) -- A rescue plan for troubled bond insurers MBIA Inc. and Ambac Financial Group Inc. may be in place before they lose their top AAA ratings, New York Insurance Department Superintendent Eric Dinallo said.

Regulators are trying to help the companies raise $15 billion of capital to avert downgrades and may consider splitting their municipal bond and subprime-mortgage debt businesses, Dinallo said yesterday in an interview on Bloomberg Television. New York Governor Eliot Spitzer told Bloomberg Radio today that the insurers must get new money within days or he will step in.

``You are either going to see capital infusion plans or some kind of a more dramatic structural change,'' Dinallo said from Washington, where he testified at a hearing of the House Financial Services subcommittee on capital markets into the insurers. ``A few months from now, the companies are not going to look exactly the same.''

Dinallo may have less than two weeks to find a solution. Moody's Investors Service said it plans to complete its review of Armonk, New York-based MBIA and Ambac of New York by the end of the month. The world's two largest bond insurers guarantee $1.2 trillion debt and the loss of their AAA ratings would cast doubt on the rankings of thousands of schools, hospitals and local governments around the country.

``It is going to take a gargantuan effort for Dinallo to pull all of the disparate parties together on this to forge an enduring solution,'' David Havens, a credit analyst at UBS AG in Stamford, Connecticut, said in an e-mail. ``But the threat of unilateral regulatory action should be a strong motivating factor for everyone.''

No Bailout Needed

MBIA tumbled 82 percent the past 12 months and Ambac has declined 88 percent in New York trading as the value of securities tied to subprime mortgages they insure fell. MBIA Chief Financial Officer Chuck Chaplin and Ambac Chief Executive Officer Michael Callen yesterday told the committee they don't need a bailout or added oversight.

The companies received a boost yesterday after Moody's said the companies are in better shape than smaller competitor FGIC Corp. Moody's cut FGIC's insurance units six levels to A3 from Aaa, and said the company is about $4 billion short of the capital needed to sustain a top rating.

MBIA shares fell 12 cents to $12.50 in early New York trading. Ambac rose 12 cents to $10.65.

Private Equity

``I wouldn't view that as being an empty threat,'' Havens said of Spitzer's comments. ``I interpreted that comment as basically being a shot across the bow of the banks and other parties with skin in the game to come to the table and come up with a solution.''

New York's regulators last month organized banks to begin plans for a rescue and are talking to private-equity firms and sovereign wealth funds, Dinallo said. The companies probably need about $5 billion and a line of credit for $10 billion, he said.

``We are encouraging them to resolve these transactions quickly within a finite number of days,'' Spitzer said today. ``If they're not going to happen, then we need to act quickly'' to find other ways to offer capital relief.

Dinallo reached out to billionaire investor Warren Buffett to value the mortgage business of Ambac, MBIA and FGIC. Buffett this week said he offered to take over $800 billion of the municipal debt guaranteed by the companies for about $9 billion.

Buffett's plan would allow the insured bonds to retain their AAA rating, and leave Ambac and MBIA with guarantees on mortgage securities and other debt responsible for the companies' losses.

`Very Confident'

Other companies may step in to back the municipal debt, Dinallo said. ``I feel very confident we can get the capital through the municipal side of the book,'' Dinallo said.

Banks, which bought protection for collateralized debt obligations, stand to lose $70 billion if bond insurers are stripped of their to ratings, Oppenheimer & Co. analyst Meredith Whitney in New York said last month.

The insurers are reeling from their expansion beyond municipal debt to CDOs, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk.

Concern that MBIA and Ambac may lose their top rankings has spread to the $300 billion market for auction rate securities. Investors, wary that the municipal debt they are buying may soon be downgraded, have fled the market, causing more than $20 billion of auctions to fail this week.

Moody's analyst Jack Dorer said yesterday that he plans to complete a review of Ambac and MBIA by the end of the month. MBIA has raised $2.5 billion of capital and Ambac sought insurance on some of its guarantees, making them ``better positioned'' than FGIC, Dorer said.

Moody's is saying ``they're not on death's door yet,'' said Christopher Whalen, a managing director at Hawthorne, California-based Institutional Risk Analytics. ``That's unfortunately what the market's been thinking, but these things are not going to collapse tomorrow.''

To contact the reporters on this story: Brian Sullivan in New York at bsullivan@bloomberg.net; Christine Richard in Washington at crichard5@bloomberg.net

Last Updated: February 15, 2008 08:13 EST