Dec. 20 (Bloomberg) -- MBIA Inc. fell the most since 1987 in New York trading after the world's biggest bond insurer disclosed that it guarantees $8.1 billion of collateralized debt obligations that investors say have a greater chance of losses.

``We are shocked management withheld this information for as long as it did,'' Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. ``MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors.''

MBIA, Ambac Financial Group Inc., and other insurers are being reviewed by credit-rating companies on concern they don't have enough capital to cover potential losses stemming from mounting downgrades of the securities they guarantee. Fitch Ratings ratcheted up the pressure on MBIA today, saying it would reassess its AAA insurance rating for a possible downgrade and gave the company four to six weeks to raise at least $1 billion.

More than $2 trillion of insured securities would lose their AAA ratings amid mass downgrades of bond guarantors. MBIA fell $7.07, or 26 percent, to $19.95 at the close of regular New York Stock Exchange trading. Ambac rose 24 cents to $27.70.

MBIA posted a document on its Web site late yesterday showing it insured $8.1 billion of so-called CDOs-squared, which repackage other CDOs and securities linked to subprime mortgages. Rising delinquencies on subprime loans contributed to downgrades on 2,007 CDOs last month alone, according to Morgan Stanley.

The ``eleventh-hour'' disclosure by MBIA ``ignites concerns all over again about the prospect for future losses,'' Kathleen Shanley, an analyst at bond research firm Gimme Credit in Chicago, wrote in a report. She said outside investors didn't know about the CDOs-squared, which she called the riskiest type of CDO.

MBIA Response

MBIA said in a statement late today that it disclosed in an Aug. 2 conference call with investors that it insured such transactions. It didn't break out every type of holding in that disclosure because less than 25 percent of the underlying collateral in the deals was mortgage-backed bonds.

In five CDOs-squared MBIA insured, the majority of collateral was CDOs of corporate loans, according to the statement. Between 12 percent and 38 percent of the collateral was CDOs of asset- backed securities including mortgage bonds, the company said.

Yesterday, Standard & Poor's lowered its outlook to negative for the AAA ratings of the bond insurance units of Armonk, New York-based MBIA and Ambac.

The $30 billion of exposure for MBIA Insurance to CDOs linked to residential mortgage-backed securities that S&P listed in its report yesterday includes the CDOs-squared disclosed by MBIA, S&P said today in response to investor inquiries. A Dec. 14 analysis by Moody's also included the exposures, Jack Dorer, an analyst at the New York-based ratings company, said in an e-mail message.

Bond Risk

Credit-default swaps for MBIA soared as much as 145 basis points to 625 basis points, the widest ever, before narrowing to 568 basis points, according to prices from CMA Datavision in London. That means it costs $568,000 a year for an investor to protect $10 million in MBIA bonds from default for five years.

One-year contracts surged to 1,050 basis points, prices from broker Phoenix Partners Group show. That implies investors are pricing in a 20 percent chance of default by March 2009, according to a JPMorgan Chase & Co. valuation tool used by Bloomberg.

Contracts on MBIA's bond insurer, MBIA Insurance, climbed 55 basis points to 300 basis points after reaching 340 basis points earlier today, CMA prices show. Contracts tied to Ambac rose 17 basis points to 582 basis points, according to CMA.

``How is confidence expected to return to the capital markets when these types of surprises continue to pop up?'' said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.

Market Overreaction

The Markit CDX North America Investment Grade Index, a benchmark credit-default swap index linked to the bonds of 125 companies including MBIA Insurance, rose 1 basis point to 78.5 basis points, according to Deutsche Bank AG in New York.

Potential losses from the CDOs-squared are ``hardly the kind of hit that should cause severe spread widening or the stock to crash,'' Barclays Capital credit analyst Seth Glasser said in a note to clients today. He said the CDOs MBIA disclosed yesterday may be less risky than investors are betting.

Fitch's rating review on MBIA is more aggressive than actions by Moody's and S&P. Both of those companies affirmed MBIA's AAA insurance rating with a negative outlook. Moody's and S&P also didn't set a deadline for MBIA to raise additional capital.

Fitch cited deterioration on some of the $22 billion of securities MBIA insures that are backed by second-lien mortgages. MBIA announced last week it was setting aside $500 million to $800 million to cover expected claims on those bonds.

Warburg Pincus Investment

On Dec. 10, MBIA said Warburg Pincus LLC agreed to purchase $500 million of new shares at $31 each and to ``backstop'' a private placement rights sale for an additional $500 million in an effort to bolster capital. Three days later, MBIA in a regulatory filing said the deal was contingent on performance-specific covenants and referenced a schedule of undisclosed conditions.

Warburg had been provided details of the CDOs-squared before the deal, MBIA said in its statement today. Chuck Dohrenwend, a Warburg Pincus spokesman, declined to comment.

Stress Test

S&P ran a stress test to determine the losses bond insurers would take on securities backed by subprime mortgages, including CDOs. Losses were projected at $3.1 billion for MBIA, $1.8 billion for Ambac, and $2.2 billion for Financial Guaranty Insurance Co.

MBIA's higher loss potential was attributed to the company's guarantees on securities backed by home equity loans, S&P said.

MBIA Insurance stands behind about $652 billion of municipal and structured finance bonds. Ambac insures $546 billion of debt.

MBIA's disclosure explains why S&P and Moody's Investors Service turned more negative on the industry in recent weeks, Zerbe said. Last month, Moody's said MBIA was ``unlikely'' to fall below its target capital level for an AAA bond insurer despite downgrades of securities backed by subprime mortgages. Ambac had been flagged as ``moderately'' likely to need more capital.

``This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac,'' Zerbe wrote.

CDOs have accounted for the biggest portion of the more than $70 billion in writedowns in the past two quarters at the world's biggest banks. CDOs-squared have lost the most on a percentage basis among CDOs linked to subprime mortgages, New York-based Merrill Lynch & Co.'s third-quarter disclosures showed.

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

Last Updated: December 20, 2007 19:05 EST