MBIA, the world's largest bond insurer, said it has exposure to $30.6 billion in complex mortgage securities that it insures, an amount that eclipses its entire net worth.
MBIA'S stock plunged by 27 percent, bringing its total decline for the year to more than 70 percent.
MBIA has exposure to $8.1 billion of collateralized debt obligations, or CDOs, including mostly risky debt known as CDO squared, or CDOs backed by other CDOs, it reported on its Web site late on Wednesday. The company's net worth as of September 30 was $6.5 billion.
The announcement may imperil MBIA's $1 billion investment from buyout firm Warburg Pincus, according to rating firm Egan-Jones Rating Co.
"The $1 billion by Warburg is conditioned on no material adverse effect," Egan-Jones said in a statement, noting MBIA's disclosure likely amounted to that condition.
Julie Johnson Staples, a Warburg spokeswoman, did not return a phone call seeking comment.
"We are shocked that management withheld this information for as long as it did," Morgan Stanley said in a report, referring to the CDO-squared exposure.
"This new disclosure completely changes our view of MBIA being a 'more conservative underwriter' relative to Ambac," the second-largest bond insurer, said the Morgan Stanley report, which was co-written by analysts Ken Zerbe and Yoana Koleva.
A spokeswoman for MBIA did not return a phone call.
MBIA's CDO exposure is the latest sign that pristine top ratings of bond insurers are in jeopardy of downgrades by rating agencies.
Insurer ACA Financial Guaranty Corp was cut to junk status by Standard & Poor's on Wednesday, while S&P assigned negative outlooks to four other large insurers, including MBIA, indicating their triple-A credit ratings were at a heightened risk of being cut in the next two years. S&P said on Thursday that MBIA's CDO exposure was already reflected in its analysis.
Triple-A ratings are a core part of the business model for the industry, and lower ratings may cause a ripple effect that forces more Wall Street banks to take billions of dollars of losses on the insured securities.
Credit protection costs on MBIA surged 100 basis points, an investor said. The cost of protecting MBIA's debt rose to 600 basis points, or $600,000 a year for five years to protect $10 million of debt.
S&P yesterday also cut its outlook to negative on MBIA, Ambac , XL Capital and Financial Guaranty Insurance.