Wachovia sold the LCCCA's construction bonds in late March of 2007, and administers their funds. As a part of the deal, the $64 million in bond proceeds was handed over to M&T Bank, which is responsible for investing the bond proceeds until the money is actually spent. The investment was put out to bid, in compliance with the law, under a multitude of factors that I don't pretend to understand. I do know that the funds must be readily available, and bidders must have held an AAA rating. MBIA was the highest bidder, offering 5.3% interest.
The problem started when the major financial rating agencies found out that MBIA has a substantial exposure in guaranteeing equities consisting of sub-prime mortages. Even though this is only a part of MBIA's overall business, they could lose a LOT of money on these shaky investments. As a result, the major rating agencies lowered their assessment of MBIA's creditworthiness.
This triggered provisions in the LCCCA's contract with MBIA, which spell out that in the event the company investing the LCCCA's funds would lose two steps in its credit rating, MBIA has fifteen days to either "collateralize" the LCCCA's remaining funds (which I understand means MBIA must have enough cash on hand to repay the LCCCA's money)*, or the LCCCA has the RIGHT to request all of their remaining funds to be refunded, without penalty and with accrued interest. The LCCCA leadership has clearly stated that if MBIA does not collateralize their funds by the end of the 15 days, or July 7th,they will demand all of their money back. If this were to happen, the $25 to $30 million remaining would be reinvested in money market funds.
Here's where it gets complicated: the LCCCA isn't the only agency looking for similar guarantees. When MBIA's credit rating was reduced, it triggered similar provisions on many other contracts. On top of that, some agencies/companies/people will no longer do as much business with MBIA, simply because their credit rating is less than perfect.
MBIA has been trying to avoid disaster by selling off municipal bonds, which are the safest investment available. MBIA claims they have more than enough cash to meet their contractural obligations. However, if for some unknown reason they don't, MBIA would be forced to ask the courts for bankruptcy protection. If MBIA would declare bankruptcy before the LCCCA funds are collateralized or refunded, the LCCCA would be unable to access its money. As a result, construction of the project would quickly come to a halt.
As best as I can tell from reading multiple news sources, the LCCCA's money is most likely quite safe. But however unlikely, bankruptcy could happen.
Editor's note. "Collateralizing" might be achieved by having others with an AAA or AA rating add their guarantee.