Moody's Investor Services' recent downgrade of MBIA Inc. (NYSE: MBI) from Aaa to A2, a five notch drop, will cost MBIA more than $7 billion. MBIA is the country's leading insurer for municipal bonds and stable corporate bonds such as utility bonds. Due to increasing uncertainty regarding MBIA's mortgage related investments, Moody's judged MBIA to have only limited financial flexibility to address continued deterioration of its mortgage related portfolio, which has already taken a cumulative loss in excess of $2 billion.

MBIA must come up with $2.9 billion to cover potential termination payments in Guaranteed Investment Contracts (GICs). The company must also pony up $4.5 billion more to meet collateral posting requirements for these GICs. MBIA senior management insists it has more than $25 billion in assets, of which $15 billion is available to satisfy these collateral requirements.

So who do you believe? Both Moody's and S&P downgraded MBIA. The company's senior management says things are more or less fine. Clearly investors are backing Moody's and S&P. The stock closed on 6/25 at $4.91, and may be headed to its 52-week low of $4.25. MBIA's 52-week high was $68.98, but we shall not see numbers like that for many a day.

After all of the talk of splitting itself into two pieces, a "bad" part and a "good" part, Ambac (NYSE: ABK) will probably operate as only one company. The theory had been that the healthy muni-bond insurance operation should be separated from the business that insured more risky derivative instruments.

Breaking the company in half always had a number of complications, the worst of which is what would happen to common shareholders? Would they get shares in the "good" part of the business? Perhaps, but outside firms putting in money might want to keep that for themselves. Shares in the "bad" part of the business would probably be worthless.

Another issue is the legal troubles a split might cause. According to the FT, this raised the "possibility of lawsuits by banks and other groups that bought insurance on CDOs and other structured products."

Ambak is almost certainly going to have to live with its two businesses under that same roof. If the structured finance business continues to fall apart, the real question is how much more money will the insurance company have to raise.

Douglas A. McIntyre is an editor at 27wallst.com.

The New York Times fingers hedge fund manager William Ackman for yesterday's down market. That's because Ackman has been a vocal pioneer of the idea that bond insurers lack the capital to back their bets on the solvency of the bonds they insure and they might lose $24 billion as a result. And the holders of those bonds are banks and insurance companies which will be forced to write-down the value of those bonds -- to the tune of $70 billion more -- if the bond insurers lose their AAA ratings.

I wrote about Ackman's bet against bond insurance last May. If you had followed my suggestion to follow Ackman's short sales of MBIA (NYSE: MBI) and Ambac Financial Group (NYSE: ABK) you would have profited from the respective 81% and 89% declines in these stocks since then. And as a protege of Harvard Business School Professor Michael E. Porter -- with whom I worked -- I admire Ackman's analytical skills and his willingness to put money into his bets. Moreover, Ackman pledged to give the profits from his bond insurance short sales to charity.

But Ackman's estimate of the losses from downgraded bond insurers is big and scary. His report yesterday predicted that MBIA and Ambac might lose $24 billion on the CDOs they guaranteed. That $24 billion is a significant percentage of the $1 trillion in municipal, corporate and mortgage debt that they insure with their AAA ratings. Unfortunately, ratings agencies like S.& P. and Moody's Investors Service may downgrade them due to a lack of capital relative to their potential losses.

Yesterday, the market rebounded from down 300 to up 300 points on the strength of rumors of a bailout for bond insurance companies like MBIA Inc. (NYSE: MBI). But today's article in the New York Times suggests to me that there may be less there than meets the eye. That's because the report says that insurance regulators are trying to raise $15 billion from Citigroup (NYSE: C), Merrill Lynch (NYSE: MER) and Goldman Sachs Group (NYSE: GS).

Is anybody home? In case anyone forgot, Citigroup and Merrill bot announced huge losses and are scrambling to raise capital. Citi lost $1.99 a share and Merrill lost a cool $12.01. Fortunately, they've recently raised $18.7 billion and $12.8 billion respectively from Sovereign Wealth Funds (SWFs). But as a Citi investor, I don't want it turning around and investing that capital in yet another subprime-related house of cards.