Banks bailing out their own SIVs are practically ensuring their own sudden collapse when (not if) the first significant fire sale of mortgage securities happens.

This is 100% correct, guaranteed.

http://www.iht.com/articles/2007/12/03/business/siv.php
WestLB to guarantee $25 billion in liquidity to five SIVs

Published: December 3, 2007

FRANKFURT: The German bank WestLB said Monday that it would guarantee full liquidity to several of its investment vehicles that had put money into asset-backed securities - a step meant to limit fallout from the subprime lending crisis in the United States.

WestLB, based in Düsseldorf and one of the regional German banks, or Landesbanken, has two major programs, known as Harrier Finance and Kestrel Funding, which borrow money by selling short-term commercial paper to investors. They then invest the proceeds in higher-yielding securities, including ones backed by U.S. mortgages.

WestLB also has three other similar investment vehicles, known as conduits. All five will have the option of drawing as much as €25 billion, or $36.6 billion, as the short-term paper comes due.

"This will ensure that there is no compelled liquidation of the assets in the SIVs," said Armin Kloss, a WestLB spokesman, referring to structured investment vehicles. "We are also convinced that the assets that Kestrel and Harrier have could be more highly valued, but that the market is not ready for that."

WestLB said in August that "less than 5 percent" of its investments were subprime-related, Kloss said. But trading in asset-backed securities has largely stopped, so a forced sale now would cost dearly.

Like other banks - and many politicians - WestLB is betting that the market will eventually recover.

Joaquín Almunia, the European Union commissioner for economic and monetary affairs, warned Monday against new rules aimed at ameliorating the crisis. Any regulatory response to the crisis must be "considered and measured," he said.

"It is too early to reach firm conclusions on what has gone wrong in risk management in the financial sector and whether regulatory initiatives are needed," Almunia said in Brussels.

Structured investment vehicles are at the heart of the financial crisis unleashed by the deteriorating U.S. mortgage market. Questions about the losses from bad SIV investments have shaken credit markets, and pushed up short-term interest rates as banks hoard liquidity to guard against surprise losses.

HSH Nordbank, based in Hamburg, is taking a similar step that of WestLB, covering all of the €3.3 billion that its vehicle, called Carrera Capital, has issued. The step has helped secure its stable credit ratings with Moody's Investor Service and Standard & Poor's.

"What we're trying to do is avoid a write-down," Reinhard Schmid, an HSH Nordbank spokesman, said. "We can do that with liquidity."

Two German banks needed an outside rescue in August when speculation in subprime-related securities via the vehicles went badly awry. But those problems far outstripped what much more stable banks like WestLB and HSH Nordbank are facing. IKB Deutsche Industriebank and SachsenLB set up funds that were triple or quintuple the size of their capital on hand.

The British bank HSBC said last week that it would spend $35 billion to bring two vehicles it ran directly onto its books, effectively turning the bank into their guarantor of liquidity.

A similar principle lies being the so-called "SuperSIV" - officially known as the Master Liquidity Enhancement Conduit - that Citigroup, the largest sponsor of such vehicles in the world, has proposed. Together with Bank of America and JPMorgan Chase, Citigroup is proposing that $80 billion be devoted to buying up mortgage-backed securities and holding them until the market relaxes.

The banks are aiming to have the fund operational by early next year.

The mortgage backed securities market can only recover if house prices suddenly stop falling and the threat of a recession suddenly dissapears.

That's the only way they will see value return to these assets.

Nice joke eh

It's not a joke. It's actually the reason why central banks are trying to hyperinflate their way out of this mess.

And by the way, the asset-backed market is already dead which is as relaxed as it'll ever get.

The complexity of these instruments are buying them time to sit and ponder their losses. This information is hardly getting any show time and even many seasoned economists are unclear as to what is going on.

Once the public understands the true extent of this mess, there is going to be some serious fallout.

I don't know whether the outcome will be inflationary or deflationary but I've already bought gold due to lack of faith in this fraudulent fiat banking system.

Looking at the big picture one would have to conclude that the world's entire fiat based currency system is about to collapse I cannot believe I said that but I now believe its true

It is collapsing, right now.

Nobody wants bonds, not even government bonds because they're the worst thing you could hold on to during hyperinflation.

This is 100% correct, guaranteed.

http://www.ft.com/cms/s/0/7d92a308-a12e-11...00779fd2ac.html
Bond market illiquidity hits eurozone

By Joanna Chung, Gillian Tett and Michael Mackenzie in London

Published: December 3 2007 00:01 | Last updated: December 3 2007 00:01

A severe bout of illiquidity has hit eurozone government bonds, threatening to impair the ability of some governments and other borrowers to meet their funding needs in coming months, according to market specialists.

The development is striking because it underlines the degree to which problems in the US subprime mortgage market is spilling over into seemingly unrelated sectors, including traditionally safe government bond markets in the single currency region.

In recent weeks, risk premiums on eurozone government bonds, except those of Germany – which is the largest and most liquid market in the region – have been rising.

“European government bond markets are facing challenges they haven’t done for decades,” said Steven Major, head of fixed-income strategy at HSBC. “We are seeing a repricing of risk and a level of illiquidity we haven’t seen for a long time.”

I think this a separate issue. This seems to me to imply that people are worried about the euro breaking up.

US treasury bond yields are falling which does not signify that the bond markets believes there will be hyper-inflation.

That is just the FED monetizing the short end of the curve to inject liquidity.

Just another one of their dirty tricks. It would show up in M3 which they no longer publish.

The ECB on the other hand can't do it because it still publishes M3 and it would be caught out.

eh?

10 year bond yields have been falling for some time.

Straight from the horse's mouth:

http://www.federalreserve.gov/boardDocs/sp...121/default.htm
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

do you have any evidence that this is happening in practice and wouldn't people notice?

Please listen to what Mozilo is saying. Mozilo is the CEO of Countrywide.

He is saying that the problem is bleeding in prime mortgages.

Time to get out of all stocks and bonds.

http://www.cnbc.com/id/15840232?video=602801604&play=1#

This is the mark of the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...;refer=currency
Three-Month Euribor Rises to Seven-Year High

By Gavin Finch and Steve Rothwell

Dec. 4 (Bloomberg) -- The cost of borrowing euros for three months surged to the highest since December 2000 as banks sought funding over the year-end amid an ongoing credit squeeze.

The euro interbank offered rate, the amount banks charge each other for such loans, rose 2 basis points to 4.86 percent, the European Banking Federation said today. That's 86 basis points more than the European Central Bank's benchmark rate.

Borrowing costs have soared over the past three weeks as banks hoarded cash to cover their commitments into 2008, and as more than $60 billion of writedowns linked to defaults on mortgages stoked concern about the strength of financial institutions.

``It's a reflection of the concerns about funding due to continued worries about the fallout from the subprime market,'' said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh. ``Funding pressures will intensify until this year is out of the way. We still don't know how bad the bank situation is.''

The Organization for Economic Cooperation and Development said the estimated losses from U.S. subprime foreclosures may reach as much as $300 billion.

``There's a lack of trust between banks and the banks themselves are uncertain about the liquidity requirements they will have up to the end of the year,'' ECB council member Nicholas Garganas said today at a conference in Athens.

Citi SIVs on Moody's negative review
http://www.ft.com/cms/s/0/18454366-a1e2-11...00779fd2ac.html




By Saskia Scholtes in New York

Published: December 3 2007 21:46 | Last updated: December 3 2007 21:46

Six of Citigroup's seven structured investment vehicles could lose their top ratings from Moody's Investors Service, the rating agency has said.

Downgrades for the $64.9bn of off-balance sheet debt vehicles, which have been put on watch, could exacerbate already stressed conditions for short-term paper backed by assets, as holders of SIV-issued paper are forced to exit the market to comply with investment guidelines.

This in turn could place more pressure on banks to stand behind the US Treasury-backed plan for a $75bn "superfund" to buy assets from cash-strapped SIVs. The plan would prevent banks from having to take such vehicles on to their balance sheets and stop a potential fire sale of assets from the SIV portfolios.

There have been reports that European banks are discussing creating a similar conduit that would buy distressed assets being sold by SIVs and other vehicles.

SIVs sell short-term paper backed by long-term, higher-yielding assets such as mortgage securities or corporate bonds. Many have suffered in the credit squeeze as investors have baulked at paper that could be exposed to the mortgage crisis.

Without access to the market for short-term paper, three SIVs have been pushed into default and others have been bailed out by their bank sponsors. HSBC last week unveiled plans to take $45bn of SIVs on to its balance sheet. The bank said the plan was to provide certainty for the SIV investors and shareholders, and to support the broader market by removing the threat of a fire sale of the assets its vehicles held.

Assets in SIV portfolios are about 38 per cent financial institution debt, 16 per cent asset-backed securities, such as mortgage bonds, and 12 per cent collateralised debt obligations – complex securities backed by other bonds. The downgrades for the Citigroup SIVs, which were part of a review of $130bn of SIV debt, are "a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities," Moody's said.

The net asset value of the Citigroup SIVs dropped to below or near 60 per cent of their face value, prompting the ratings action, Moody's said in a statement. The junior notes of three of the funds have been downgraded to "junk".

Citigroup, the largest manager of SIVs in the $300bn market, was forced to provide $7.6bn of emergency funding for the seven SIVs it runs this month, after the vehicles were unable to repay maturing debt.

Investors in such short-term paper are typically risk-averse and have beaten a swift retreat from SIV- issued paper.

A Florida state fund that was holding downgraded SIV notes was last week forced to act to stop a run on its investment pool as investors withdrew more than 40 per cent of the fund's money.


More bad news for Citi (sorry about the formatting)

10 Rumors That Are Making the Rounds

By Doug Kass
RealMoney Silver Contributor
12/4/2007 3:25 PM EST


Every few weeks, I recap 10 tidbits I've picked up from trading desks and other industry sources. These items have not been confirmed, but they either have affected or could affect the stocks mentioned.

1. A publicly held homebuilder will shortly file bankruptcy. (Hint: It currently trades for under $10 per share.)

2. More land deals -- similar to Lennar (LEN - Cramer's Take - Stockpickr - Rating)-Morgan Stanley (MS - Cramer's Take - Stockpickr - Rating) -- are on the plate.

3. Numerous capital infusions are being planned in the domestic mortgage insurance and origination areas, with acquirors in the real estate and finance areas.

4. Over there, a large bank bailout will be announced by year-end. (I think in Germany, again.)

5. Two large brokerage firms will announce major head-count reductions in the next week.

6. A handful of $1 billion to $5 billion hedge funds have already announced closure at year-end. A major commodities trading firm and several large funds of funds will close. Expect to read about these disclosures over the next 10 days.

7. Several sizable cross-border mergers will be announced by year-end, and one $25 billion-plus deal may be made public by next Monday morning. Kohlberg Kravis Roberts will make a large consumer products acquisition by January's end.

8. Two brokerages will announce a change in strategists' assignments by year-end.

9. Friday's jobs number will be very weak, with a drop of over 50,000 jobs.

10. High-end retail sales have been sluggish.

Read the red sentence, as it is of paramount importance.

1) When (not if) the first bond insurer is downgraded from AAA to AA, billions in municipal bonds will automatically be downgraded too.
2) This will force many pension funds and other institutional investors which by statute can only hold AAA debt to dump the muni bonds they hold
3) The muni bond market crashes, yields go up
4) Higher yields = municipalities pay more interest = more defaults
5) Other bond insurers are hit. Go back to step 1.

http://www.fxstreet.com/news/forex-news/ar...66-5ec7e21c9ef5
Tue, Dec 4 2007, 20:16 GMT
Bond Insurers Seek New Capital After CDO Foray Goes Awry

SAN FRANCISCO (Dow Jones) -- Bond insurers are on the hunt for new capital because they expanded too far into complex structured credit products like collateralized debt obligations in the midst of the real estate bubble, stretching business models unsuited to the task, critics say.

Industry giants Ambac Financial (ABK) and MBIA Inc. (MBI) , and smaller rivals like Security Capital Assurance (SCA) , have lost at least half their market value in the past two months on concern they may lose their AAA credit ratings. Without top ratings, the companies could struggle as even their bread-and-butter business of insuring municipal bonds becomes tricky.

...

Bond insurers agree to pay principal and interest when due in a timely manner in the event of a default. It's a $2.3 trillion business that offers a credit-rating boost to municipalities and other issuers that don't have AAA ratings.

If a state with a single A rating wants to sell bonds, it will have to pay more interest. But if one of the AAA rated bond insurers guarantees the debt, then the issuer gets that top rating and pays a lower interest rate. The bond insurers generate revenue by charging the issuer an annual premium that's less than it saved on the lower interest rate.

If a bond insurer loses its AAA rating, this business model is imperiled because the debt it guarantees will then only be able to be AA rated at most, offering issuers a less valuable credit-rating boost. In addition, the billions of dollars of debt that the bond insurer has already guaranteed will also be downgraded.

CGNAO - WELL DONE - you weathered the storm when almost everyone said and thought you were mad - but you were not mad - you were in fact just 'ahead of your time'.

So those that did not have your vision - would be well advised to listen to what you have to say ref the economics of the crash of which this is the end of the beginning - so if you want an idea of what is happening and going to happen you would be well advised to listen to what CGNAO has to say......

What dictates step 2?
Might the statue be changed or avoided?

Seconded

Statutes are legally binding, sometimes irrevocable, and when they are not they are extremely laborious to change. And it can take months, if not years to do so in compliance with the law. There will simply be no time. Managers will have to sell first and ask questions later.

CNN: "We're pretty close to a point where the capital markets fail to function properly"

http://money.cnn.com/2007/12/04/markets/cr...tlook/index.htm

ominous, one thing you havn't suggested is a short term, and I mean 'immediate' effect, average Joe will experience and more importantly recognise.

Bank runs.

No chance IMHO,..ahem...'they' won't let it happen...again

Just wait and see.

They have lost control and are desperate.

Once the public realises the financial situation of certain banks, 'they' wont be able to stop it happening.

Oh dear

http://news.goldseek.com/RichardDaughty/1196870460.php

"there is currently at least a $1,000 trillion dollar black hole in the world economy", what with "$600 trillion in world liabilities, plus more than a $400 trillion-derivatives neutron bomb, all of which will go off when the Westerners (from EU and US) will no longer be able to borrow."

This is the mark of the beast.

The FED and all central banks are in panic mode, they must keep inflating exponentially or die.

This is 100% correct, guaranteed.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
Fed May Couple Rate Cut With New Measures to Increase Credit

Dec. 5 (Bloomberg) -- Federal Reserve officials, who are forecast to lower their main interest rate next week, are signaling that they are looking for additional ways to increase credit to companies and consumers.

The Fed may lower the discount rate -- what it charges banks for short-term direct loans -- by a quarter-point more than the benchmark rate after Vice Chairman Donald Kohn and San Francisco Fed President Janet Yellen publicly expressed frustration that previous rate cuts haven't encouraged banks to lend to one another.

Such a move would narrow the gap between the two rates -- normally 1 percentage point -- to a quarter-point. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim they are taking advantage of a better deal.

``The Fed has to re-liquefy the markets to reduce the risk of a financial accident,'' said Lou Crandall, who used to work at the New York Fed and is now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that focuses on government debt.

More of the same. It's everywhere.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
Orange County, California, Says Funds Hold SIV Debt on Review

By Michael B. Marois and William Selway

Dec. 5 (Bloomberg) -- Orange County, California, bankrupted in 1994 by bad bets on interest rates, bought structured investment vehicles similar to those that caused a run on funds invested by local governments in Florida.

Twenty percent, or $460 million, of the county's $2.3 billion Extended Fund, with an average maturity of about 16 months, is invested in so-called SIVs that may face credit- rating cuts, said Treasurer Chriss Street. In all of its funds, the county holds a total of $837 million of SIV debt, including $152 million in its $3.5 billion of money-market funds that isn't under ratings review, said his spokesman, Keith Rodenhuis.

No bid, no market, no price, no value = bankruptcy.

http://www.bloomberg.com/apps/news?pid=206...&refer=bond
Florida Fund's Debt Has `Indeterminate Value,' BlackRock Says

By Darrell Preston and David Evans
More Photos/Details

Dec. 5 (Bloomberg) -- Much of the debt held by a $14 billion Florida investment fund for schools and local governments is worth less than face value and the rest is so troubled that its value can't be determined, according to an official at the Wall Street firm hired to turn around the fund.

Keep it coming cgnao. You and people like Jim Sinclair are providing a true SERVICE to others. Even if only 1 person protects themselves with gold and by limiting their cash in banks to the bare minimum then all will have been worth it.

I'm buying another 7 ounces of Ag this week, and buying $10,000 worth on the 20th December when I get a rebate I am due. I must say I am able to sleep well at night being in pure physical gold and silver and totally out of the markets.

All I'm doing now is sitting back and watching the show.

It's not every day you can witness an uber 1929/Weimar/WORSE wordwide implosion taking place. Academically I find it fascinating, but on a personal level this fiatsco is going to send personal pain levels for the unprepared off the Richter Scale.

Ir's the death of the global financial prison. Me, I can't wait.

Short term it will suck, and then we will see an outpouring of creativity the like of which the world has rarely seen.

P.s. Gold is no longer backed by the churches fiat decree, people will quickly adapt without it.

Hi, what does this mean, if I may ask?

Gold is no longer backed by the churches fiat decree, people will quickly adapt without it.

Oh, gold was the last monetary systems fiat currency because you needed it to get married. (Wedding ring)

Now most people aren't religious and gold is traded on memory of that time and general sentiment. Most people simply aren't that religious any more. They'll just adapt. It's just another metal without that need really.

Thirded.

There used to be a mysterious gold guru by the name of 'Another' (and later, FOA - Friend of Another) who wrote regularly on a gold forum (USAgold) back in the 90s. He spoke of a time when gold would hit circa $50,000 an ounce (that was hinted at but again he could not give of course precise figures) - long story short, all the probabilities he described so well all those years ago are now happening right before our eyes. He always said he could not predict an exact time-frame, but I am convinced that we are in the midst of his scenario now.

This a preview of how ugly all this is going to get.

This is a million ENRONs, all happening together.

When all is said and done the world will be a very, very different place.

http://www.reuters.com/article/domesticNew...555776120071205
Wall St firms subpoenaed by NY prosecutors: WSJ
Wed Dec 5, 2007 3:46am EST

NEW YORK (Reuters) - New York state prosecutors have sent subpoenas to Wall Street firms seeking information related to the packaging and selling of debt tied to high-risk mortgages, the Wall Street Journal reported, citing people familiar with the matter.

The subpoenas, sent by the New York attorney general Andrew Cuomo's office, request information from Merrill Lynch & Co., Bear Stearns Cos and Deutsche Bank AG, people familiar with the matter told the Journal.

A spokesman for the attorney general's office declined to comment on the report.

The investigation is examining how adequately investment banks reviewed the quality of mortgages before packaging them into products that were then sold to investors, the people told the Journal, adding that the subpoenas also requested information about how the debt was pooled into securities, including the banks' relationship with credit-rating firms.

A Merrill spokesman declined to comment on the subpoena but told the Journal, "We always cooperate with regulators when asked to do so."

Bear Stearns and Deutsche Bank declined to comment, the Journal said.

The probe appears to be examining the relationships between mortgage companies, third-party due-diligence firms, securities firms and credit-rating firms as they relate to the role securities firms played in the subprime mortgage crisis, the Journal said.

Cuomo last month said he had subpoenaed investment banks related to his ongoing probe into U.S. mortgage loans.

At the time he said he had concerns about mortgage loans that Washington Mutual sold to those banks, which he declined to name.

I am seriously jealous on all these lawyers who will become insanely wealthy through this mess.

That is ground-breaking! Doesn't it deserve its own thread?
This could so easily lead to the court case of this century!

I would say you have lost control and are desperate.

This is brilliant.

I want to see the bankers responsible going to prison.

They're desperate to ramp their precious back up over $800, but they can't. They're all tapped out.

Whodda thunk with all this apocalyptic news wherever you turn precious would be falling and $USD strengthening?

It should be $50,000 by now. But it isn't. Because it's mostly sh*t.

Thanks for that. I think I'll watch the Matrix tonight.

So, you short gold then?

Slowly, the realization of the mess we're in is sinking in.

This is not 1929, it's at least a thousand times worse.

This is 100% correct, guaranteed.

http://www.washingtonpost.com/wp-dyn/conte...7120402186.html
It's Not 1929, but It's the Biggest Mess Since

By Steven Pearlstein
Wednesday, December 5, 2007; Page D01

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing, yet.

What's important to understand is that, contrary to what you heard from President Bush yesterday, this isn't just a mortgage or housing crisis. The financial giants that originated, packaged, rated and insured all those subprime mortgages were the same ones, run by the same executives, with the same fee incentives, using the same financial technologies and risk-management systems, who originated, packaged, rated and insured home-equity loans, commercial real estate loans, credit card loans and loans to finance corporate buyouts.

It is highly unlikely that these organizations did a significantly better job with those other lines of business than they did with mortgages. But the extent of those misjudgments will be revealed only once the economy has slowed, as it surely will.

You all switching pitiful GBP into other currencies, brace yourselves for the greatest worldwide liquidity hurricane the world has ever seen, in each and every currency.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
ECB Officials Concerned on Growth, Open Rates Debate (Update2)

By Simon Kennedy and John Fraher

Dec. 5 (Bloomberg) -- European Central Bank policy makers signaled growing concern that surging credit costs will hobble the euro-region economy, suggesting they may soon back a cut in interest rates.

ECB council member Christian Noyer said yesterday there's a ``question mark'' over initial hopes Europe would dodge the fallout from the U.S. housing slump. Executive Board member Jose Manuel Gonzalez-Paramo said the previous day lower rates would be justified if financial-market turbulence slows growth.

This is the mark of the derivative beast.

It is claiming exponential liquidity injections which by immutable economic law is hyperinflationary.

This is 100% correct, guaranteed.

http://www.reuters.com/article/bondsNews/i...05?rpc=401&

NEW YORK, Dec 5 (Reuters) - The manager of the world's biggest bond fund said on Wednesday that the situation of bond insurer MBIA Inc shows that the entire banking system needs more and cheaper capital.

Bill Gross, chief investment officer at Pacific Investment Management Co. or Pimco, was speaking on CNBC television.

Earlier, credit rating agency Moody's said the risk of a capital shortfall at MBIA was greater than previously estimated.

I have long believed the Euro has been propped up politically for two reasons: 1. To provide an outlet for US dollars so investors would not go into hoarding gold and silver, and 2. To support the concept of a Federal Europe.

In reality the Eurozone is an Empire full of basket case countries.

This is the big one. 100% correct, guaranteed.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
MBIA Shares Drop After Moody's Says Capital in Doubt

By Christine Richard

Dec. 5 (Bloomberg) -- MBIA Inc. had the biggest drop in more than 20 years in New York Stock Exchange trading after Moody's Investors Service said the biggest bond insurer is ``somewhat likely'' to face a shortage of capital that threatens its AAA credit rating.

A review of MBIA, the largest bond insurer, and six other AAA rated guarantors, will be completed within two weeks, Moody's said in a statement today. Moody's said additional scrutiny of the Armonk, New York-based bond insurer's mortgage-backed securities portfolio caused it to revise its assessment last month that MBIA was unlikely to need more capital.

``The guarantor is at greater risk of exhibiting a capital shortfall than previously communicated,'' New York-based Moody's said. ``We now consider this somewhat likely.''

The loss of MBIA's top ranking would cast doubt over the ratings of $652 billion of state, municipal and structured finance bonds that the company guarantees. MBIA is among at least eight bond insurers seeking to ward off potential credit-rating downgrades by Moody's, Fitch Ratings and Standard & Poor's. The insurers guarantee $2.4 trillion of debt and downgrades could cause losses of $200 billion, according to Bloomberg data.

Egan-Jones Ratings Co., a credit researcher, estimates that MBIA will need to raise more than $4 billion, Sean Egan, managing director of Egan-Jones said. That compares with the company's market capitalization of $3.6 billion.

``It's Moody's firing a warning shot saying `you have two weeks, so do something,''' said Paul Berliner, a trader at Schottenfeld Group, which manages $100 million in New York. ``The drama behind MBIA and Ambac should be the most important focus for the entire financial sector right now. Everyone should be on the edge of their seats wondering how this plays out.''