NEW YORK (Dow Jones)--Credit rating downgrades at major bond insurers could cause banks to take another $40 billion in write-downs in 2008, disappointing investors who were betting U.S. financial institutions got the worst of their losses behind them in the fourth quarter, Oppenheimer analyst Meredith Whitney said Wednesday in a note to clients.
Those losses will be concentrated in just three banks: Merrill Lynch & Co. (MER), Citigroup Inc. (C) and UBS AG (UBS), which Whitney estimated together hold about half of the industry's exposure to protection written on complicated debt instruments by insurers MBIA Inc. (MBI), Ambac Financial Group Inc. (ABK) and ACA Capital Holdings Inc. (ACAH).
The heavy concentration of exposure persuaded Whitney to drop her previous belief that the big insurers are too big to fail. She now sees the problem as one facing a few banks rather than the financial system as a whole, and as a result doesn't think a bailout is viable.
"While we had previously believed the monoline insurers MBI and ABK were too important to fail due to the threat of systemic risk and thus would likely be bailed out, we no longer think systemic risk is even realistic or a bailout of the monolines even viable," Whitney wrote. "The implications of no rescue plan/bailout are clearly negative for these companies."