The endgame appears to be near for troubled bond insurers Ambac (ABK) and MBIA (MBI). Yesterday Moody's (MCO) downgraded Financial Guaranty Insurance Co., a private insurer co-owned by Blackstone (BX), PMI Group (PMI) and other financial firms.

Regulators are calling for a swift resolution to the problem, with New York Governor Elliot Spitzer demanding the insurers raise capital within three to five days in order to stave off downgrades. State Superintendent Eric Dinallo suggested breaking up the companies, despite claims that both remain solvent.

The disparity between regulators and the industry they allegedly control highlights the complex nature of a situation that may determine the near-term direction of the world's financial markets.

Actively engaged in capital-raising efforts, Ambac and MBIA have eschewed calls for a bailout, claiming concern over liquidity is fear mongering by short-sellers.

Only two weeks ago, on its earnings conference call, MBIA vehemently defended its capital position, saying that suggestions MBIA has liquidity concerns "could not be further from the truth."

In an interview with the Wall Street Journal, Ambac's interim CEO Michael Callen rejected the notion the firm needed a bailout, stating "[t]his is a very solid, liquid, high-earning, well-managed company that is responding to not a reality, but perceptions of where mortgages are going over the next four to five years."

As our friends at BTIG point out, if both bond insurers and regulators are so confident these firms are solvent, "why not prompt the rating agencies to do their job and affirm or downgrade the companies now … the longer the farce is perpetuated, the more investors will get hurt."