The regulator overseeing efforts to prop up FGIC said the troubled bond insurer should come up with fresh capital in “the next 30 days” to avoid worst-case scenarios such as closing down.

Eric Dinallo, the New York State insurance superintendent, said his department was working “avidly” on resolving FGIC’s crisis, which has resulted in sharp cuts in its credit ratings.

In a video interview with the Financial Times, Mr Dinallo said FGIC, which insures billions of dollars of municipal and structured bonds, could go into “a run-off” if it does not find fresh funds, a situation which would result in “no more business being done”. His department would then “air-traffic control the policies” and determine the order in which claims would be paid out.

FGIC’s challenges have deepened after Standard & Poor’s last week cut its rating to junk. Only four months ago, it had a triple-A rating and was reassuring investors it was actively pursuing a plan to shore up its capital base.

PMI Group, FGIC’s principal owner, has dismissed the possibility of contributing additional capital. However, FGIC has sought approval from the New York State Insurance Department to hive off its municipal insurance unit from its riskier structured-finance operation.

“It has to get resolved pretty soon, because otherwise, they’re just going to slip into lower and lower downgrades, and then we’re going to be in scenarios that nobody wants,” Mr Dinallo said. “I think a month is a long time in these markets right now.”

The picture is further complicated by growing litigation by FGIC and others questioning whether they are liable for paying out insurance policies.

Mr Dinallo said the need for bond insurance by the many small municipal borrowers would continue, even if states such as California and New York could borrow without such backing.

There are five triple-A rated bond insurers. Ambac and MBIA, the biggest two, had their ratings reaffirmed this year after raising new capital. Some, such as FSA, did not have much exposure to mortgages. New entrants include Warren Buffett’s Berkshire Hathaway, which Mr Dinallo’s office gave a licence to within a month.

Mr Dinallo said more new entrants could emerge. “We are talking to some bulge-bracket investment banks about forming triple-A rated subsidiaries.”