Allied Capital (NYSE: ALD) is playing out by the book - that is, David Einhorn's book! Allied and David Einhorn have been involved in what some on Wall Street have regarded as an epic struggle between themselves, regulators, government officials, and several government organizations. In fact, Einhorn even wrote a complete book on the struggle called "Fooling Some of the People All of the Time". His premise is that Allied's loan portfolio (or that of its subsidiaries) has been impropertly valued - a thesis that may now prove to be true.

Allied Capital announced that Ciena Capital, one of its portfolio companies, voluntarily filed for bankruptcy protection today. The company said Ciena has continued to experience "significant deterioration" in the value of its assets due to the uncertainty of the financial markets and a reduction in the number of loan buyers. As a result, Allied said its unconditional guaranty of the obligations outstanding under Ciena's revolving credit facility may become due.

This is bad news for Allied Capital as it may be required to pay $320 million to the lenders in connection with the revolving credit facility. This is $150 million of the cash Allied gained on the sale of its good investments while it may have to borrow another $170 million of its unsecured revolving line of credit. Some believe that this could put the company's all-important dividend at risk - the dividend that so many investors have stayed in the stock to receive.

Allied Capital Corporation (ACC) is a closed-end, non-diversified management investment company that operates as a business development company. The Company’s investment objective is to achieve current income and capital gains. The Company is engaged in private equity business. ACC primarily invests in debt and equity securities of private companies in a variety of industries. From time to time, it may invest in companies that are public but lack access to additional public capital.