(Update 1: adds MBIA comments) Call it the bond insurer crisis, part two: Fitch Ratings on Friday said it had downgraded a core rating of industry giant MBIA Inc. (MBI) and its subsidiaries amid concerns over capital adequacy. The rating agency moved MBIA's core insurer financial strength rating to AA, from it's previous perch at the AAA level, the latest in a series of downgrades to beset the bond insurance industry. Both companies have been publicly bickering over the ratings process in the recent past, with MBIA requesting that Fitch withdraw its ratings of the insurer on March 7, and Fitch questioning the company's motives for doing so. Insurers like MBIA provided the top-rated portions of RMBS and related CDO deals with a guarantee that essentially is designed to serve as a private-party proxy for the government guarantee that exists on Fannie/Freddie/Ginnie bond issues. But the strength of that guarantee is only as good as the rating of the firm that provides it, which means that downgrades to bond insurers have wreaked havoc on an already unsteady mortgage-backed bond market. Fitch said in a press statement that MBIA's pro-forma claims paying resources at year-end 2007 of $16 billion fell below Fitch's 'AAA' capital targets by a range of $3.4 to $3.8 billion. The rating agency said it had updated its assessment of MBIA's $30.1 billion exposure to SF CDOs (including $8.7 billion in CDO-squareds), using a deal-by-deal level analysis for each CDO insured by the company. MBIA has complained in the past that Fitch didn't have access to the company's complete data, since it didn't rate each CDO deal. Expected losses on MBIA's SF CDO portfolio will ultimately fall within a range of $3.1 to $4.9 billion, Fitch estimated. MBIA, as might be expected, took issue with the ratings action. "We respectfully disagree with Fitch's conclusions," said C. Edward Chaplin, MBIA CFO, in a press statement. "MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio, factors which we believe enable MBIA to meet severe economic stress scenarios." The company's stock fell only slightly on the news, which came with roughly one hour in the trading day left; MBIA shares were off 3.57 percent to $13.78 when this story was published Disclosure: The author held no positions in MBI when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.