Ambac Financial Group Inc. said yesterday in a letter that support for bond insurers through a Treasury-backed guarantee program could have "an exponentially positive impact for several critical sectors of the U.S. economy."

An effort to stabilize financial guarantors through the guarantee portion of the Treasury Department's $700 billion Troubled Asset Relief Program could help municipal issuers, banks with exposures to guarantors, individual investors with insured bonds, and others, Ambac president and chief executive officer David Wallis wrote.

"By enabling financial guarantee insurers to cap their catastrophic loses, the guarantee program would stabilize bond insurance ratings and help restore credibility to their guarantee in the marketplace," Wallis wrote. "This would in turn enable financial guarantee insurers to return to insuring municipal debt issues, which would help restart the flow of credit to state and municipal issuers and thus benefit the economy as a whole."

The letter came as part of a request for comments from the Treasury on its guarantee program.

A number of other guarantors also submitted comments, including MBIA Inc., which gave its recommendations for how the guarantee program should function while saying it believed a direct purchase of troubled assets or equity infusion into financial institutions would better achieve the Treasury's goals.

Assured Guaranty Corp., Syncora Guarantee Inc., and H. Russell Fraser, considered as one of the founders of the financial guarantee business, also submitted letters.

Ambac suggested a two-part guarantee plan to help financial institutions, including the bond insurers. One part would help "free up" capital while the other would lower the capital risk of future downgrades to securities and help increase market liquidity for them.

The Treasury should create an excess of loss portfolio guarantee program to deal with capital problems, Ambac said. Companies could pay a premium for a policy from the Treasury, where the government would reimburse a portion of losses beyond one amount but before another "detachment" point, it suggested.

The Treasury could also directly back existing securities, Ambac said. This could help assets that face illiquid markets even though the underlying collateral is performing.

"The guarantee program should be designed to address issues that cannot be efficiently addressed by the purchase program while minimizing credit risk to the U.S. taxpayer," Ambac said.

Syncora Guarantee also noted in its letter that the guarantee program could help insurers and therefore issuers of municipal debt. Syncora suggested the Treasury should "directly guarantee the principal and interest payments at the mortgage-backed securities level," wrote Susan Comparato, acting chief executive officer and president of Syncora Holdings Ltd.

Aside from measure to help financial institutions, insurers could benefit if they are hired to assist in the Treasury's guarantee program.

Also yesterday, cable network CNBC reported that New York insurance superintendent Eric Dinallo has asked the Treasury Department to inject capital into the bond insurers.

Wisconsin insurance commissioner Sean Dilweg also suggested last week insurers could ask the government for an equity infusion.

The New York Insurance Department would not comment on the report.

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