Jan. 17 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., battered by losses from the collapse of the subprime mortgage market, fell the most ever in New York Stock Exchange trading on concern they will lose their AAA credit ratings.

New York-based Ambac dropped 52 percent and Armonk, New York-based MBIA fell 31 percent as Moody's Investors Service and Standard & Poor's increased their scrutiny of bond insurers. Credit-default swaps on both guarantors rose to records, signifying investors see a growing chance that the companies won't be able to pay their debt.

``Issuers and investors have to prepare themselves for the possibility of a downgrade,'' said Matt Fabian, an analyst with Municipal Market Advisors in Westport, Connecticut. Fabian said he still expects the companies to keep their rankings.

Ambac, which yesterday cut its dividend and ousted its chief executive officer after reporting greater-than-expected writedowns on the bonds it insures, said the Moody's decision was ``surprising.'' Losing the AAA stamp would cripple the bond insurers and throw doubt on the ratings of $2.4 trillion of debt the industry guarantees, causing as much as $200 billion in losses, according to data compiled by Bloomberg.

Moody's said today it may cut the rating MBIA depends on to sell bond insurance, after saying yesterday it may do the same with Ambac's.

MBIA, down 87 percent in the past year, dropped $4.18 to $9.22. Ambac plunged $6.73 to $6.24 and has now fallen 93 percent in the past 12 months.

The companies have each lost more than $8 billion from their market value since the beginning of 2007.

Credit-Default Swaps

``Until we find firm ground, meaning a point where the market thinks it has enough information to assess the overall scope of credit market losses, and how the losses for various institutions are interlinked, we fear that uncertainty and volatility will rule the day,'' UBS AG credit analyst David Havens in Stamford, Connecticut, wrote in a note to clients yesterday.

Credit-default swaps tied to MBIA's bonds soared 10 percentage points to 26 percent upfront and 5 percent a year, according to CMA Datavision in New York. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.

The price implies that traders are pricing in a 71 percent chance that MBIA will default in the next five years, according to a JPMorgan Chase & Co. valuation model.

Contracts on Ambac, the second-biggest insurer, rose 12 percentage points to 27 percent upfront and 5 percent a year, prices from CMA Datavision in London show.

Ambac's implied chance of default is 73 percent, according to the JPMorgan data.

High Default Risk

The contracts trade upfront when investors see a risk of imminent default. MBIA and Ambac are trading at levels reached by Countrywide Financial Corp., the mortgage lender besieged by speculation it would file for bankruptcy before agreeing last week to be bought by Bank of America Corp.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

MBIA's subordinated notes sold last week tumbled 4 cents on the dollar today to 84.5 cents, bond traders said. The insurer raised $1 billion in the Jan. 11 offering of so-called surplus notes.

New Reviews

Moody's and S&P started new reviews one month after affirming ratings on Ambac and MBIA. Both companies slashed dividends and announced plans to raise up to $2 billion to shore up capital and retain their top rankings. Losses at bond insurers have drawn questions from the U.S. Securities and Exchange Commission as well as New York insurance regulators.

New York State Insurance Superintendent Eric Dinallo is examining whether to limit the types of debt that can be guaranteed by bond insurers, department spokesman David Neustadt said today.

Billionaire investor Warren Buffett is taking advantage of the bond insurers' missteps by starting his own financial guarantor. Buffett's Berkshire Hathaway Inc. may also invest in a bond insurer, Ajit Jain, head of Berkshire's new business, said in an interview Jan. 9. Jain declined to comment when reached by telephone today.

Ambac's credit rating may be cut after the company said it may write down the value of securities it guarantees by $3.5 billion, Moody's said in a statement yesterday. The losses include a $1.1 billion for collateralized debt obligations.

`Significant Change'

``This is a significant change in Ambac's view of the ultimate losses to be realized from these transactions,'' Moody's said. The report ``significantly reduces the company's capital cushion and heightens concern'' about losses on mortgage-backed securities, Moody's said.

Ambac shareholder Evercore Asset Management LLC called on the bond insurer to accept a downgrade rather than follow through on its plan to raise capital.

``The company gambled its AAA rating and has now lost that bet,'' Evercore said in a letter to directors distributed in a PRNewswire statement today. ``Attempting to buy back the AAA rating by giving away most of the company makes no sense.''

S&P began a new examination of all bond insurers after increasing its predictions for losses on subprime mortgages. S&P is now assuming losses on 2006 mortgages to people with poor credit will reach 19 percent, up from 14 percent, as housing prices decline further than it previously thought, the ratings company said today.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net

Last Updated: January 17, 2008 18:11 EST