New York's insurance industry regulator has pledged to continue his attempts to recapitalise ailing bond insurers, despite concerns that the resignation of the state's Governor could derail the process.

Eric Dinallo said that his steps to stabilise bond insurers should buy enough time to create stability in other finance sectors.

He told a hearing of the House of Representatives committee inquiring into the crisis that he had misgivings about variants of collateralised debt obligation investments known as CDOs Squared or CDOs Cubed. Unlike most CDOs, which are directly supported by collateral, they are backed by other CDOs. Mr Dinallo said that he was considering whether bond insurers should be prohibited from covering such investments.

Eliot Spitzer, who announced his resignation yesterday after becoming embroiled in a prostitution scandal, had played a leading role in seeking to bail out an industry crucial to the health of the financial system. Two weeks ago he oversaw the raising of $1.5 billion (£750 million) by Ambac, which the bond insurer secured by issuing new shares.

Toby Nangle, a fixed income manager at Barings Asset Management in London, described Mr Spitzer as “useful because he was very aggressive and assertive . . . The guy did not have a lot of love on the [Wall] Street, but he was helpful in getting things moving quickly. People are only going to put risk capital in place for their own benefit, not because they are told to. I think he has performed his duty in getting the key players in the same room and making them talk to each other. That was his critical role. Once they're in the room, it's up to them.”

Mr Dinallo intimated that the bond insurance industry would become far smaller as a result of the crisis. “Some governments have stated recently that they believe they no longer need bond insurance. That may mean that the demand for bond insurance shrinks,” he said.

For decades a handful of specialist American insurers have underwritten bonds issued by local governments. The process allowed states to raise money cheaply for public projects such as roadbuilding and protected the lenders from the risk of default.

The insurers, such as Ambac and MBIA, sought to boost their revenue by insuring bonds backed by mortgages issued to homeowners with poor credit ratings. Many of the bonds are now effectively worthless.

There are fears on Wall Street that the insurers will not be able to pay out on all the contracts they have underwritten, which would trigger an even bigger crisis in credit markets, described by Mr Spitzer as a “financial tsunami”.

Local governments in America are already having to pay more to raise capital or put off public spending.

Twists and turns

— The troubled companies, known as monoline insurers, wrote guarantees that bonds would be paid, a pledge that helped to sell the debt to investors

— One of them, FGIC, sued IKB, the German bank, yesterday, alleging that the lender had left it exposed to $1.9billion (£937million) in potential liabilities

— Eric Dinallo is working on a recapitalisation of FGIC, which is due to be completed this week

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax