WASHINGTON (Bloomberg) — US lawmakers criticised the practices of MBIA Inc., Ambac Financial Group Inc. and the rest of the bond-insurance industry, saying they turned good debt bad and need to be put under the supervision of a federal regulator.

"It now appears that like a child who finds a book of matches, they have gotten burned," Representative Paul Kanjorski of Pennsylvania, who was presiding over a hearing in Washington of the House Financial Services panel on capital markets yesterday. "We must hope that they don't ignite our economic house as well."

Bond insurers with AAA ratings have guaranteed $2.4 trillion of securities, including municipal bonds. Downgrades may force sales by investors who are required to hold only the highest-rated debt and cut profit for banks that have already posted $146 billion of write-downs and credit losses in the past year.

The expansion by the industry beyond their traditional municipal-bond businesses to guaranteeing debt linked to riskier subprime mortgages and home-equity loans, "has had disastrous consequences," Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, told the panel. "Congress must make sure that someone is watching out for the taxpayers."

New York Governor Eliot Spitzer said the problems of the bond insurers are spreading well beyond the financial markets. He said the turmoil is already raising the cost of college loans and museum budgets, affecting state and local taxes and forcing some municipalities to shift funds away from schools and other projects in order to pay the higher interest rates on new debt. "If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy," Spitzer said.

Representative Michael Capuano, a Massachusetts Democrat, said municipal-bond insurance amounts to extortion of cities and states and said the industry has failed, turning good debt bad.

Kanjorski proposed enacting a law that would allow the Federal Home Loan Banks "to enhance municipal bonds with letters of credit like Fannie Mae and Freddie Mac already do."

Spitzer said that would be a "very worthy idea."

MBIA chief financial officer Charles Chaplin, Ambac chief executive officer Michael Callen and hedge fund manager William Ackman were also scheduled to comment yesterday. New York Insurance Department Superintendent Eric Dinallo, US Securities and Exchange Commission director Erik Sirri and Keith Buckley, a group managing director at credit rating agency Fitch, are also scheduled to appear.