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Rate cuts or no rate cuts, the news just keeps getting worse for the big bond insurers, or monolines. On Thursday morning, or rather, just after midnight US eastern time, MBIA, the world’s largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guaranteed, reports Bloomberg.

MBIA’s Q4 net loss was $2.3bn, or $18.61 a share, heightening concerns that the New York-based company will lose its Aaa rating at Moody’s Investors Service.

At the same time, reports the Wall Street Journal, MBIA said it closed on its $500m stock sale to private equity investor Warburg Pincus, part of a deal announced earlier this month that will have Warburg invest up to $1bn in the troubled bond insurer. As part of the deal, two Warburg managing directors took seats on MBIA’s board of directors, replacing two current directors.

In its press release, MBIA chief executive Gary Dunton said the capital-raising initiatives would offset the credit impairments the company expected to take, reports the Journal.

We can definitely believe Dunton’s statement that: “We are disappointed in our operating results for the year”. According to the Journal, MBIA’s Q4 derivatives write-down is more than 10 times as large as the $352.4m write-down it reported in the third quarter, an indication of the rapidly worsening US housing market and its effect on securities backed by loans made to credit-challenged customers.

News of MBIA’s loss came a day after FGIC’s insurance unit became the third company to be stripped of its Aaa credit rating and downgraded to Aa.It also came just after shares in MBIA and Ambac, the second-biggest bond insurer, tanked in New York on Wednesday, sliding 15.9 per cent and 12.6 per cent, respectively, on fears of imminent downgrades. What’s more, according to Bloomberg, among other disgruntled investors, hedge fund manager William Ackman has stepped up pressure on the monolines. Ackman, a managing partner of Pershing Square Capital Management, released a letter to US regulators on Wednesday, estimating MBIA’s CDO losses would reach $11.6bn.

Adding to the cheer, John Thain, Merrill Lynch’s new chief executive, told the FT on Wednesday that while individual credit insurers would most likely receive capital infusions from investors, it would be difficult to craft an “industry-wide” bailout for the beleaguered guarantors. In other words, the $15bn that New York State insurance superintendent Eric Dinallo is trying to persuade Wall Street banks to cough up for a sweeping monoline rescue plan is unikely to appear.

And in a separate report, the FT has an update on the serious impact MBIA and Ambac’s troubles are having on the “normally sedate” world of municipal bond investing.

Municipal bond yields have spiked sharply higher versus US Treasuries, “a sign that long-term investors are selling munis because of a perceived increase in risk” - and about half the $2,600bn municipal bond market is guaranteed by bond insurers led by MBIA and Ambac.

It is also a sign, according to the FT, of forced selling from a little-known but important group of short-term municipal bond investment vehicles - known as “tender option bonds” - that have run into acute stress in recent weeks, based on suspicions about the quality of bond insurers’ guarantees on the paper that they issue.

TOBs have been popular with money market funds - which are required to invest in short-term and highly-rated paper and to maintain the value of every dollar invested. TOB programmes issue securities backed by long-term municipal bond assets, in a market worth about $400bn, according to FT estimates.

Now, amid the growing likelihood that the bond insurers will lose their crucial Aaa ratings, money market investors are selling TOB paper to protect themselves from the risk of downgrades.

At the same time, MBIA is “reeling from an expansion out of municipal securities into guaranteeing CDOs”, notes Bloomberg, “and as the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital”.

Without the Aaa stamp, notes the FT, MBIA would be unable to lend a top rating to new securities, crippling its business and throwing ratings on $652bn of debt into doubt. It is this kind of threat - of massive knock-on losses - that prompted Dinallo and the New York State Insurance Department to call a meeting of banks last week to discuss a rescue.