The Wall Street Journal and The Financial Times report this morning that New York Governor Eliot Spitzer is stoking the fire his insurance superintendent has set under the monoline bond insurers, saying they have five days tops to shore up (subscription site) their capital or be busted up.

Spitzer testified on Capitol Hill to a House subcommittee on capital markets that he could slice off the monolines’ large municipal-bond-insurance businesses if they don’t act quickly. He is trying to prevent downgrades of the bond insurers from sharply raising the borrowing costs of municipalities across the country. Yesterday, credit raters slashed the third-largest monoline’s rating six notches below the top-rated AAA, potentially affecting $300 billion of bonds.

Separating the municipal bond part of the business from the structured-finance part that has gotten them in trouble would be bad news for Wall Street, which would face tens of billions of dollars in write-downs because of the resulting downgrading of the bond insurers’ credit ratings. But Spitzer and Eric Dinallo, his insurance regulator, say their primary consideration is to protect municipalities and their bondholders:

If we do not take effective action, this could be a financial tsunami that causes substantial damage throughout our economy.

The WSJ reports that Spitzer broke congressional protocol by turning the tables on a top Republican inquisitor and “aggressively asking” him questions. Sounds like the fierce mentality that has spurred the governor repeatedly to act on Wall Street while the federal government twiddles its thumbs.

A Bloomberg News report says another clock is ticking for MBIA and Ambac, the two biggest bond insurers: Moody’s Investor Services will complete its review of their credit ratings in less than two weeks.

The Journal goes big (subscription site) with a page-one scoop about a run on the bank at a Citigroup hedge fund that’s caused the bank to prevent investors from cashing out of their holdings in the fund called CSO Partners.

The Journal says the fund’s manager bet the house on a leveraged loan last June, just before the credit markets began to crumble. The bet violated Citigroup limits on such transactions by wagering more than half of the fund’s assets on a single transaction, but the WSJ doesn’t elaborate on those limits or how the manager evaded them.

The fund manager tried to cancel his order because of the suddenly deteriorating credit markets, and Citigroup fought it for six months before caving in December and saddling the fund with $750 million of securities that had already shed up to 14 percent of their value. The manager quit a week later and investors began attempting to take their money out shortly thereafter.

As if Citigroup wasn’t in enough trouble, here come the lawsuits:

Some investors in the fund contend that executives at Citigroup didn’t supervise Mr. Pickett closely enough. “I don’t understand…how it would have been possible for him to take on a position that was disproportionately larges,” says one investor in CSO.

As a bonus, the Journal twists the knife (subscription) with a report on A11 that another fund Citigroup created in the fall, to take advantage of the credit crisis, lost more than half its value last quarter. This is a good read that combines the ingredients we’ve come to know so well—hubristic bankers, near-sighted credit raters, and bad debt—into a simple but tasty credit-crisis stew.

The FT reports that Wall Street is preparing to walk away from its obligations to fund the more than $100 billion in leveraged buyouts stacked up from last year. Banks have been worried about their reputations, but they presumably are betting those can’t get much more tarnished, so they’re planning to back out of deals gone bad.

The paper reports that advisers are saying the breakup fees owed by banks would be less than the cost of assuming debt that is worth less than the face value of the loans, though the banks risk huge lawsuits in walking away. A wave of abandoned deals would further trip up stock markets.

If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specializing in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”

A WSJ report on the front of its Money & Investing section quotes people familiar with the matter as pretty much damning Bear Stearns and Ralph Cioffi, whose hedge funds collapsed last summer. The collapse was a signal that something big was about to happen in the credit markets.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.