There’s breaking news this morning out of Europe: big subprime write-downs at Credit Suisse, which, unlike its Swiss competitor—and let’s face it, seemingly every other big bank—UBS had been relatively untouched by the credit bust.

Just a week ago, Credit Suisse reported that it had emerged scot-free in the fourth quarter from all the turmoil. But, uh oh, the company now says “mismarkings and pricing errors by a small number of traders” will lead to a nearly $3-billion write-off, according to Bloomberg News. We’re sure those “mismarkings” and “errors” were entirely innocent.

The FT quotes one analyst saying, “This is a disaster. This could be the tip of the iceberg.” It’s been a disaster for shareholders so far today. The stock is down more than 8 percent.

This story should get nice and juicy over the next few days.

In related news, The Wall Street Journal says Lehman Brothers, another bank that so far has been fairly untroubled by subprime events, is about to get hit by a big write-down. It says Lehman’s huge stack of commercial real-estate loans is deteriorating.

Lehman has some $90 billion worth of assets that are vulnerable to write-downs. The company is worth $29 billion on the stock market.

New York Governor Eliot Spitzer’s threats to the monoline bond-insurance industry appear to be hastening the denouement of that dismal story. The Wall Street Journal leads its Money and Investing section with a report that Ambac, the second-largest bond insurer is seeking to raise $2 billion to facilitate dividing itself into two companies, something Spitzer and his insurance chief have suggested needs to happen this week.

Ambac, whose shares are worth 11 cents on last year’s dollar, is the second bond insurer to prepare to split itself into two businesses with very different prospects: municipal-bond insurance (good, pretty safe) and corporate structured finance (bad, maybe insolvent). FGIC Corp., a smaller bond insurer, late last week said it would consider a similar step.

This has Wall Street howling “No fair!” and threatening big-time lawsuits, according to Bloomberg.

“This is one of the worst possible outcomes for the market,” Gregory Peters, head of credit strategy at Morgan Stanley in New York, said in a telephone interview. Lower ratings would force banks that own the mortgage-backed debt to write down the value of the securities by as much as $35 billion, he estimated.

But it’s too late. The big boys aren’t going to be able to keep stalling this next huge wave of write-downs. The bond-insurance business is fatally flawed, everyone knows it and dancing around the issue for weeks just gives markets the unfortunately not entirely wrong idea that the fix is in. The downside for taxpayers in hundreds of municipalities across the country who would have to pay significantly more interest on their debt is too severe to let this charade go on. The key structural issue here, as the FT’s Lex column points out, is getting the bond insurers back to “what they should be: dull, slow growing insurers of safe municipal debt.”

There’s certainly no possible clean break here. The FT
and the Journal smartly point out that splitting up the bond insurers will raise serious questions about the value of an unknown amount (but certainly in the many billion of dollars) of derivatives—bets against the companies’ survival, in large part made by banks looking to hedge their exposure to an implosion by those companies.

That’s an angle that bears paying close attention to over the next days and weeks. Not that this is a new thing these days, but somebody’s going to lose a lot of money there.

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 rc2538@columbia.edu.