Credit rating downgrades at major bond insurers could cause banks to take another $40 billion of writedowns in 2008, disappointing investors who were betting that U.S. financial institutions had put the worst of their losses behind them in the fourth quarter, according to an Oppenheimer & Co. Inc. analyst.
The losses will be concentrated in just three banks — Merrill Lynch & Co. Inc., Citigroup Inc., and UBS AG — Meredith Whitney wrote in a note sent to clients Wednesday.
Ms. Whitney estimated that the three companies together hold about half of the industry's exposure to protection written on complicated debt instruments by the insurers MBIA Inc., Ambac Financial Group Inc., and ACA Capital Holdings Inc.
The heavy concentration of exposure persuaded Ms. Whitney to drop her previous contention that the big insurers are too big to fail. "While we had previously believed the monoline insurers … [MBIA and Ambac] 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," she wrote. "The implications of no rescue plan/bailout are clearly negative for these companies."
Merrill Lynch has a maximum of $3.5 billion of exposure to bond insurers, John Thain, its chief executive officer, said at a conference in New York.
Citigroup declined to comment, though it said this month that it had about $3.8 billion of exposure to monoline insurers. UBS also declined to comment, though on Wednesday it said it believes it lost $14 billion in the fourth quarter on exposures linked to U.S. mortgages.
New York state insurance regulators are working to coordinate a plan to shore up struggling bond insurers.
