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MBIA

(MBI) - Get Report

, after losing $2.7 billion in 2008, was rescued from itself by splitting off credit default swap obligations. In the first quarter, the largest U.S. bond insurer posted a profit of $697 million.

Despite the lack of failures among bond insurers, unless you include

American International Group

(AIG) - Get Report

, this business is not for the faint of heart. (TheStreet.com Ratings gives MBIA a D, or "sell," rating.)

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Shares of Armonk, N.Y.-based MBIA dropped almost 50% in January 2008 when New York State Insurance Superintendant Eric Dinallo said it would take time to create a rescue plan for bond insurers. But as with other financial firms, its stock soared starting in early March. In the past month, short sellers pushed down the stock by 15%.

As

Syncora Holdings

found out, before it was delisted in December, small and specialist is a lonely place to be when the going gets tough. Originally part of

XL Capital

(XL) - Get Report

, the bond insurer's losses mounted during 2008 and it's headed down a highway to bankruptcy.

Among other MBIA rivals,

Financial Security Assurance

( FSE) announced it will become part of

Assured Guaranty

(AGO) - Get Report

by the end of this month, forming a stronger, better-capitalized and higher-rated company.

Ambac

( ABK) is on its own and looking naked.

To put it lightly, there is a lot of uncertainty for bond insurers.

Still, if there were no profits to be made, why did Warren Buffett's

Berkshire Hathaway

(BRK.A) - Get Report

enter the market last year? A firm that belongs to the Berkshire Hathaway holding company has written $520 million in premiums this year.

The potential problem is this: MBIA's exposure to municipal bonds and mortgage-debt guarantees through credit default swaps is now separated into completely different companies. That was the New York insurance superintendent's plan for stabilizing MBIA. It took him a year to develop and implement.

It is understandable that Dinallo, who had experience with AIG, wanted to split off "bad" debts linked to credit default swaps. Unfortunately, MBIA's split looks nothing less than an attempt to circumnavigate a visit to Chapter 11 bankruptcy and a section 363 sale in the same way that

General Motors

( GMGMQ) is proposing to separate the "good" from the "bad" GM.

After AIG, Dinallo didn't want to see a repeat of a failure of such a prominent insurer on his watch. He favored a drop in the cost of municipal bond insurance and, therefore, opening the market to muni bonds. That freed up credit markets.

Many disagree with his approach, including the legal teams at

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

, which are among 15 companies that have filed suits against MBIA.

The banking giants said that, by separating the two businesses, MBIA will be able to avoid its obligations. The bond insurer is essentially creating an insolvent company because of potential claims and inadequate liquidity to meet claims, the banks argue. That approach places policyholders at a disadvantage and may potentially trigger default terms on debt provisions in the event the separated company fails.

Although there's no indication that is the situation, any debt payments that were brought forward could cause a liquidity meltdown if the group were unable to refinance or raise cash. In that case, who would want to be either a shareholder or a bondholder? (See General Motors.)

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.