Wall Street faces $10 billion in new writedowns

More bad news on Wall Street. Citi (C), Merrill Lynch (MER) and UBS (UBS) - the three firms that have taken by far the biggest hits on subprime mortgage-related holdings - could face $10 billion in further writedowns tied to last week’s downgrade of bond insurers Ambac (ABK) and MBIA (MBI), the Financial Times reports. The banks have used deals with the bond insurers to hedge against possible defaults on mortgage-related securities, but those deals are worth less with the insurers getting a lower rating. The FT reports that Wall Street executives were surprised by the timing of the decision by Moody’s to put the insurers on review for a possible downgrade, and by S&P’s subsequent move to strip Ambac and MBIA of their triple-A insurer financial strength ratings - even though it has been apparent for the better part of a year that the companies, with their thin capital cushions and hefty guarantee obligations, didn’t deserve top ratings.

On the plus side, Merrill Lynch has won a summary judgment in a dispute with another bond insurer, Security Capital Assurance’s (SCA) XL Capital Assurance. Merrill had sued the insurer, claiming it improperly attempted to terminate $3 billion worth of credit default swaps without basis. XL said Merrill entered into the deal simply to make its books look better, but the judge threw out XL’s counterclaims, The Wall Street Journal reports. The decision means XL will have to honor the swaps. ”We’re pleased by the judge’s decision in this matter,” Merrill said.