The two biggest U.S. bond insurers, MBIA and Ambac Financial Group, told CNBC that they don't need a government-led bailout despite billions of dollars of losses from subprime-related debt.
"We believe the company is well positioned to weather this storm," MBIA Chief Financial Officer Charles Chaplin said before testifying at House hearing on the problems facing the bond insurers.
Ambac CEO Michael Callen, in a separate interview before he testified, told CNBC that the "whole issue is the asset quality of some mortgage-backed securities" and there's "no question of Ambac being able to pay claims."
Both bond insurers are facing possible ratings downgrades because of their exposure to risky subprime debt. The triple A ratings are crucial to their ability to get new business, which traditionally has been insuring municipal bonds.
On Thursday, Moody's Investors Service downgraded the triple A rating of a smaller bond insurer, Financial Guaranty Insurance, saying it does not have enough capital in reserve to cover a potential spike in claims.
Lawmakers and regulators are concerned that a collapse of the bond insurers--which back the funding for building hospitals, schools and more--could inflict further pain on banks suffering from the mortgage meltdown and lead to higher taxes for homeowners.
"We need to prevent a similar situation from happening again in the future," Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services subcommittee on capital markets, said at a hearing. A solution may be for Congress to create a new federal insurance corporation for bonds, modeled on the Federal Deposit Insurance Corp., he suggested.
But New York Gov. Eliot Spitzer said more immediate action was needed. New York regulators are working with bond insurers and banks on a plan to infuse billions of dollars of new capital into the insurers. MBIA last week raised $1 billion in a stock offering. (See Spitzer's comments in the video).
On Tuesday, billionaire investor Warren Buffett said he would help out the bond insurance industry by offering a second level of insurance on as much as $800 billion in municipal bonds.
Spitzer also endorsed Buffett's idea of splitting off the bond insurers' municipal business from their other business lines to protect municipal policyholders from problems--a notion that New York state Insurance Superintendent Eric Dinallo is considering.
Dinallo has been working with banks on rescue plans for several of the bond insurers, which guarantee $2.4 trillion of debt.
Dinallo told reporters it was within the state of New York's power to force bond insurers to restructure to separate their municipal bond business from their riskier operations.
He said such a move would be an "extraordinary" measure and that the first step would be for the bond insurers to present a plan to state regulators to separate into two operating
The state could step in if the plans were not acceptable, Dinallo said. "There are also legal abilities of the state to put a company into what's called a rehabilitation or a runoff or some form of bankruptcy," he said.
The role of Wall Street credit-rating agencies in the debacle was criticized by both lawmakers and bond industry officials.