What started in the subprime mortgage bond market earlier this year is filtering into the broader credit markets, but the nervousness is less a sign of deteriorating credit quality--defaults are at historic lows of 0.3%, according to Coffey--and more an oversupply issue.

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Behind the woes of the bond insurers lies the subprime crisis.

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Bond insurers such as MBIA and Ambac Financial Group built up their businesses by insuring low-risk municipal bonds, but during the nation's housing boom, these and other bond insurers invested heavily in subprime and other mortgage-backed investments, and now they're paying the price.

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Ambac has become a poster-child for the bond insurance industry and the broader subprime meltdown.

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Subprime mortgage lenders weighed most heavily on the stock and bond markets as their businesses started to unravel earlier this year, and the fixed income markets all but froze up.

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Therefore, in yet another subprime redux, Wall Street has found a way to make the muni bond problem even worse.

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Those bond buyers often only discovered that they had bought bonds based on subprime mortgages after the mortgages failed.

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The company is struggling to hold on to the top financial-strength rating, as its capital position is severely strained by exposure to subprime mortgage securities that have deteriorated in value, triggering the possibility that Ambac and other bond insurers will have to pay out on the policies they wrote.

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Since February 2007, 69 securities class action lawsuits have been filed related to the subprime meltdown, including 11 brought by investors in auction-rate securities, two by investors in bond funds that had losses, and two against investment banks for their hand in creating the structured product market.

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