Risky Paper Hammers MBIA

Updated from 12:49 p.m. EST

Bond insurer MBIA's(MBI Quote) shares plunged anew Thursday, after its bombshell revelation of its significant exposure to the riskiest asset-backed paper.

The financial guarantor's shares dove more than 30% in early trading after the firm announced that it guarantees $8.1 billion of structured products called CDOs-squared, among some $30.6 billion in total exposure to CDOs, or collateralized debt obligations. That means MBIA guarantees payment on CDOs that package up other CDOs. Many are filled with subprime or other mortgage-backed debt, which has been subject to downgrades, deterioration in value and default of late.

The revelation sparked a warning from Fitch Ratings, a day after a similar action by Standard & Poor's, which could ultimately force the firm to scramble for yet more capital. MBIA received a $1 billion cash injection from private equity firm Warburg Pincus last week.

"We are shocked that management withheld this information for as long as it did," writes Ken Zerbe, analyst at Morgan Stanley in a note Wednesday.

A call to MBIA was not returned.

The news comes as investors are increasingly concerned that the credit market woes that have roiled financial markets in the second half of this year will intensify with the potential default or credit rating slide for a financial guarantor.

MBIA Collapse Could Snowball Across Street

The credit ratings agencies have been scrutinizing the finances of companies like MBIA and competitors Ambac(ABK Quote), Financial Guaranty Insurance Co., XL Capital Assurance, CIFG Guaranty and Financial Security Assurance. The guarantors rely on having pristine credit ratings and more than enough capital to guarantee that investors receive their payments on securities they own.

A ratings downgrade could force some fixed-income investors into a selling spree, because parameters of their investment funds require that their holdings be insured by a guarantor with a triple-A rating.