New York authorities may take the radical step of breaking up bond insurers to help them weather the slow-motion collapse of a wide swath of the structured finance market, Governor Eliot Spitzer and state insurance superintendent Eric Dinallo told Congress on Thursday.

The split—which would separate the insurers' relatively healthy municipal bond business from the guarantees made for structured finance—wasn't "optimal" but might be necessary to avoid downgrades in credit ratings, Spitzer told a House Financial Services subcommittee hearing.

Without help, bond insurers could lose their AAA credit ratings, which are needed to guarantee $2.4 trillion of municipal and mortgage-based debt—including funding for public projects like schools and roads.

As the housing market soared, bond insurers moved away from their meat-and-potatoes business into mortgage-backed debt. When that market buckled under growing defaults by unqualified borrowers, insurers suffered along with the debt issuers they promised to support.

Spitzer blamed the Bush administration for the turmoil roiling the markets, and warned that a failure to tackle the situation could spread, bringing on a "financial tsunami."

His remarks came as Moody's Investors Service lowered the credit rating of the Financial Guaranty Insurance Co. to AA from AAA. FGIC is the smallest of the major monoline insurers, after MBIA Inc. and Ambac Financial Group Inc.

In a separate hearing on the other side of the Capitol, Senator Charles Schumer of New York said he was considering legislation to regulate major bond insurers.

The hearings came on a day punctuated by partisan fighting over holding two presidential aides in contempt of Congress for having refused to cooperate with an investigation into the mass firings of U.S. attorneys. The House voted to cite White House Chief of Staff Joshua Bolten and former White House counsel Harriet Miers.

That vote pushed back much of the House hearing into early evening, provoking what House subcommittee chairman Paul Kanjorski, Democrat of Pennsylvania, called a "near rebellion" among staff members with evening plans for Valentine's Day.

But the late hour also drew some of the most interesting sparring - between hedge fund heavyweight William A. Ackman of Pershing Square Capital Management and Michael Callen, Ambac's chief executive officer—who were on the same panel of witnesses.

Ackman, who has bet that bond insurers will not be able to meet their guarantees, insisted that complete transparency is essential for investor confidence. The fear is that some of the major bond insurers do not have the capital to cover claims as defaults arise.

"Banks don't want to lend money because they're not sure of the exposure," said Ackman, who has argued against any bailout.  "Bond insurers need to provide a full list of all their exposures."

Callen, retorting that there was a "possibility" that Ackman's testimony was "self-serving," insisted that "it's all on our website," but noted that he had heard complaints that "exposing everything could be anti-competitive ... you give short-sellers an opportunity to take advantage."

"If providing more information is an advantage to short-sellers," Ackman replied, "maybe the information isn't so bullish."