That’s not what is really going on there.
The security that MBIA has is a “CDO made up of other CDO’s” - or, what is called a “CDO squared” in the finance industry.
http://www.housingwire.com/wp-content/uploads/2007/12/cdo-squared_nomura.pdf
A lot of people aren’t really “getting” the real scope of the financial market’s debt crisis because they don’t understand the actual instruments involved that are blowing up. The press keeps talking about only sub-prime mortgages; what folks need to understand is that with CDO’s, CMO’s, etc, these sub-prime mortgages have been diced, sliced and combined with other grades and maturities of debt, along with some derivatives and covenants and then sold as “AAA” or similar highest-quality debt.
The reason why the ratings agencies gave such absurdly high ratings to these CDO’s was that the ratings agencies didn’t understand the mathematics behind these synthetic securitized debt instruments.
CDO squareds take this to a whole new level of mathematical obfuscation.
I know that, justing keeping it simple, which they don’t.
Could the ratings agencies be on the hook for lawsuits? If nothing more I would think their credibility would be shot. If they did not understand it, they should have said so and not rated the securities.