Why Citigroup, UBS and Merrill Lynch – the banks most exposed to the Ambac and MBIA snafus – could face additional write-downs of up to $10 billion now that bond insurers have lost their fight to retain their triple-A credit ratings.

Wall Street executives said they had been wrong-footed by the timing of the downgrades by Moody’s and Standard & Poor’s, saying they had not expected the rating agencies to take action for several months after affirming the triple A ratings of Ambac and MBIA in February and March.

“I think Moody’s jumped the gun,” a Wall Street executive said. “They and other credit rating agencies have been under pressure to anticipate developments, rather than lag behind the curve, and this looks like an attempt to do just that.”

The banks have used the bond insurers to hedge holdings of complex bonds such as collateralised debt obligations and other mortgage-backed securities.

The prospects of further writedowns related to bond insurers, also known as monolines, could deepen concerns over the financial health of US and European banks.

Ambac and MBIA, which guarantee more than $1,000bn of bonds, raised cash earlier this year to prop up their capital bases, damaged by exposure to mortgage-backed bonds. Al-though concerns have eased that bond insurer downgrades could damage the entire financial system, there remains the potential for individual banks and investors to suffer further pain from Ambac and MBIA’s problems.

UBS, Citigroup and Merrill Lynch declined to comment.

Meredith Whitney, analyst at Oppenheimer, said in a report this week that UBS had the largest exposure to monolines of $6.3bn, Citigroup came second with $4.8bn and Merrill Lynch followed with $3bn.

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