New York Gov. David Paterson yesterday appealed to the U.S. Treasury to infuse $2 billion to $3 billion of capital into bond insurers to help lift their ratings and make insurance more available to municipal issuers.

In a letter to Treasury Secretary Timothy Geithner, Paterson said a combination of federal aid and private capital would help MBIA Inc. and other insurers further capitalize, which "could immediately result in one or more strong triple-A rated insurers, ensuring that municipal bond issuers would be able to come to market under the best possible terms."

The governor wrote that state and local borrowers have had substantial problems issuing bonds and have had to pay much higher borrowing costs or delay borrowing.

"One way to help municipal bond issuers is by reinvigorating the market for affordable bond insurance, which can stabilize or raise the credit rating of their bonds and thus lower borrowing costs," Paterson wrote.

Last week, MBIA divided its insurance business, putting its $537 billion public finance book into subsidiary MBIA Insurance Corp. of Illinois.

Standard & Poor's rates MBIA Illinois AA-minus and Moody's Investors Service assigns the insurer its Baa1 insurer financial strength rating, which is on review for upgrade.

"The reason I think MBIA is right for this is because of the separation of the business lines," said New York Insurance Department superintendent Eric Dinallo. "In order to attract capital, private or public, you needed to clarify where the capital was going to go."

Paterson also wrote that the state was in talks with the National League of Cities about licensing a mutual bond insurer that would operate as a nonprofit and would also benefit from federal aid.

A spokesman for Dinallo said that the only insurers under consideration at this time for the infusion were MBIA, Ambac Financial Group Inc.'s planned new public finance-only insurer, and the potential National League of Cities insurer.

Paterson also suggested that federal aid to monoline insurers, which could help boost the guarantors' ratings, could be a "highly efficient means to support the troubled mortgage-related assets of the nation's financial institutions."

He also proposed the creation a new company that would pool policies backing troubled assets and be backed by $25 billion in assets. The federal government would then lend the pool $10 billion to $25 billion to make policies high investment grade.

Paterson said that such a move would raise the value of credit default swaps on mortgage-related positions of many major commercial banks and financial institutions, thereby reducing the amount of troubled assets on the banks' balance sheets.

Treasury officials, however, have stated that they have no plans to provide direct assistance to existing monoline insurers.

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