NEW YORK (Bloomberg) — The US should provide bond insurers MBIA Inc. and Ambac Financial Group Inc. with capital so they can separate their municipal businesses from other operations, New York State Insurance Superintendent Eric Dinallo said.

"For several billion dollars, we could essentially split the books," Dinallo said during an interview yesterday with Bloomberg Television.

The goal would be for the Treasury Department to help municipal insurers regain AAA ratings, while structured-finance guarantors would have A level grades that would help Wall Street firms holding credit-default swaps "feel well treated", he said.

Armonk, New York-based MBIA and Ambac of New York, along with all other US bond insurers with top rankings in 2007, lost their AAA ratings last year amid surging mortgage defaults and shrinking demand as issuers and investors lost confidence.