MBIA gets top prize for understatement. When an insurer delicately refers to “supplementing” its list of collateralised debt obligation exposures, that can only be bad news. It is. It turns out that MBIA has an $8bn exposure to CDOs of CDOs (or so called “CDOs-squared”).

This is a critical nugget of information, to which the market had an allergic reaction, sending MBIA stock down 25 per cent yesterday. CDOs-squared are scary because they compound the leverage and complexity of original CDOs, already in the dog house. MBIA can say the underlying collateral is overwhelmingly AAA and AA. Nobody is listening. Markets have had enough of supposedly armour-plated securities tanking.

True, rating agencies included the exposure in their models. Investors may still wonder how this news affects MBIA’s efforts to bolster its capital position. All credit market participants have an interest in the answer to that question. If MBIA’s capital position is not strengthened sufficiently, the rating agencies could have another go at reviewing the credit rating. A downgrade would hit all the securities that MBIA insures, including the vast municipal market. Happy holidays.